What to do with heloc

Question

I'm looking for some guidance and advice. I have a fully paid for house and a heloc out on it for 235k . I'm struggling on what my best option is to get in to rentals, should I buy a single family or duplex out right or should I use the heloc as a down payment on something bigger such as a fourplex? Any information would be greatly appreciated.

Stephen Quesinberry · Answer

The main thing I’d be careful of is the HELOC itself. It’s usually tough to make deals cash flow well enough to comfortably cover that higher, variable interest rate. If the deal is even a little thin, that HELOC payment can eat up your margin quickly.

A few thoughts to consider:

• If you use the HELOC as a down payment, make sure the deal cash flows after covering both the new loan and the HELOC payment
• Be conservative on rents, vacancy, and expenses, HELOCs don’t leave much room for error
• Smaller, simpler deals (SFR or duplex) can sometimes be easier to manage and lower risk early on
• Bigger deals (like a fourplex) can work, but only if the numbers are clearly strong and not dependent on everything going perfectly

There’s nothing wrong with moving a little slower here. Just because you have access to capital doesn’t mean you need to deploy all of it right away.

I’d focus on finding one solid deal that works with conservative assumptions. If it’s hard to make the numbers work with the HELOC in the picture, that’s usually a sign to either negotiate harder or keep looking.

Marcus Auerbach · Answer

Because you don't have any actual capital to invest, BRRRR a single family using the HELOC is your only real option. Think of your HELOC a s credit card, it gives you room to maneuver, but it's not really good for long term financing.

If you take the HELOC and spend it all on a MF - your REI career ends right there after 1 purchase. A single property will cashflow maybe $200, so you have to think about scaling and not just one property.

Caleb Brown · Answer

I'd use the HELOC to do a BRRR or flip. Maybe paying cash or using hard money. Using a HELOC as a down payment on a long term loan doesn't make sense. After all the interest you can't cashflow.

Marnit Brown · Answer

At 7%+ rates the DSCR math gets tight. I'd stress-test with your expected vacancy and also 2% higher to find the floor.

What management fee are you budgeting? That alone swings DSCR by 0.10-0.15 on most deals.

Adam Tafel · Answer

Entirely depends on the deal in front of you. What is your ultimate reason for wanting to invest in real estate? Are you looking for actual income in the near future, to maximize your wealth building potential over the next 20 years, to become more tax efficient? Most of our clients are looking to use as much leverage as possible as they are thinking long-term, but I worked with a couple yesterday who decided to put 700k cash into a single duplex - their goals are entirely different than the leveraged investor.

If you feel competent within the construction world your dollars will go the further using hard money for purchases and your HELOC for downpayments , but this won’t work for every personality or risk tolerance.

Janice Carter · Answer

Aaron, you are in a strong position with that equity. It really comes down to your risk tolerance and cash flow goals. Using the HELOC as a down payment on a 3–4 unit can accelerate your portfolio and give you multiple income streams but you will also be layering debt. Buying a single family or duplex outright is lower risk and simpler but slower to scale. Run the numbers carefully and focus on cash flow after the HELOC payment, reserves and vacancy. If the deal doesn’t comfortably cash flow with conservative assumptions, it is not the right one.

Brad Seid · Answer

@Aaron Kirsch while a HELOC is a great option if you can qualify for a first mortgage or HELOAN I recommend going that route due to the interest rate being more competitive and saving you more money over the long haul.

The other alternative is doing a DSCR purchase loan which does not require verifiable income and the loan would qualify based on the rental and appraised value of the home. I do all of the above and am more than happy to give you an idea of what each would look like at the amount you need. Cheers and best of luck with you investment purchase!

Brad Seid · Answer

@Tim Kirk yes good point. What is your alternative for funds to close? Do you have other assets? Do those assets have a current return on investment?