Considering using a HELOC for down payment

11 Replies

Looking for feedback good or bad, for using a HELOC from my personal residence to finance the down payment on my first SFR. Thanks in advance for any advice.

I too am using this strategy. It seems to me that the payment on the Heloc skews the deal a bit, but is somewhat offset because you can deduct the interest. I'm interested to know if the thought is to payback the HELOC as quickly as possible to correct the cash flow.

Ryan Ohir

I have done it but I wouldn't do it again. The magic of the HELOC is being able to reuse it over and over again without having to ask the bank "mother may I?" every time. So the a HELOC is better suited to BRRRR deals or fix and flips to max its potential.

Also, HELOCs are variable rate loans so account for that in your numbers, the payment is only going to go up. And if you cannot make the payment for some reason, they will take your house to pay off the loan. Your primary residence, not the rental. Finally, once you use it as a down payment you will be tapped out again and searching for another source for the next down payment. BUT if you use it like I suggest above, then you can use it to generate down payments vice being the down payment. 

That is the way I was able to start investing in Real Estate. As my mentors at the SJ REIA cautioned me though, I never used it for a rental, only as the down payment for a flip property. You don't want to tie up your HELOC funds, as mentioned above, for a long term hold.

The interest paid was part of my holding costs, just as if I had used a bank .

I used a portfolio bank in Collingswood NJ that was investor friendly, to finance the rest of the deal.  

Here's how it worked: I had to pay 30% as the down payment to acquire the property (used my HELOC). The bank financed the remaining 70% of the acquisition, and 100% of the construction costs. The payments were interest only on the amount I had borrowed TO DATE, which helped tremendously with holding costs.

 Of course I had to provide them with a detailed list of intended repairs, which they gave to their appraiser before approving my loan. In addition, I needed to have approximately $10,000 for the first repairs.  The bank will only pay on work completed, so after I had completed about $10,000 in repairs, the bank rep came out, took pictures, and gave me my first draw payment, to reimburse me. 

You can see how having a HELOC at your disposal is very handy for fluidity and ready cash. My HELOC was paid off at closing and I was ready to repeat the process.

As @Edward B. and @Nina Davenport have said above, you should use this source of funding only for Flips...not holds. You need to be able to re-use these funds over and over again...to paraphrase Edard, "That is the Magic of the HELOC".

Thanks for the response Matthew. Yes my deal analysis is skewed a little as far as monthly cash flow. But it shouldn't affect C.O.C and Total ROI. But yes I want to pay the HELOC off as soon as possible so I can use it again for the next down payment on the next rental.

I am toying with using the strategy of parking my 9-5 paycheck into my HELOC and paying all my expenses out of the HELOC. I also like the idea of leaving a healthy unused balance in the HELOC to act as a reserve to cover any initial CAP Ex while I'm starting out.

Originally posted by @Nina Davenport :

That is the way I was able to start investing in Real Estate. As my mentors at the SJ REIA cautioned me though, I never used it for a rental, only as the down payment for a flip property. You don't want to tie up your HELOC funds, as mentioned above, for a long term hold.

The interest paid was part of my holding costs, just as if I had used a bank .

I used a portfolio bank in Collingswood NJ that was investor friendly, to finance the rest of the deal.  

Here's how it worked: I had to pay 30% as the down payment to acquire the property (used my HELOC). The bank financed the remaining 70% of the acquisition, and 100% of the construction costs. The payments were interest only on the amount I had borrowed TO DATE, which helped tremendously with holding costs.

 Of course I had to provide them with a detailed list of intended repairs, which they gave to their appraiser before approving my loan. In addition, I needed to have approximately $10,000 for the first repairs.  The bank will only pay on work completed, so after I had completed about $10,000 in repairs, the bank rep came out, took pictures, and gave me my first draw payment, to reimburse me. 

You can see how having a HELOC at your disposal is very handy for fluidity and ready cash. My HELOC was paid off at closing and I was ready to repeat the process.

 Nina, thank you for taking the time to share your experience and knowledge with me.  The specific strategy I'm looking at using goes like this; I have a local lender who is willing to extend me a line of credit secured by the rental I will buy.  I will use this line for the initial purchase, which will be around 75,000.  I will then draw from the line to rehab the property (forcing equity).  Rehab estimate of 15-20k.  So I will be all in for 90-95k. 

I will have interest only payments and a month or two of carrying costs that will be covered by my HELOC. Once the property is rehabbed I expect the ATV to be 110-115k based on recent comps in the area. My lender will then refinance the line into a traditional 30 year at 4.2%. If the appraisal is where I think it will be the lender will only require 80% LTV, so I may need to come out of pocket 5-6k to get the financing done, again using my HELOC. I'll then pay the HELOC off in 6 months and start looking for the next property. I hope I've explained this correctly it makes sense in my head :). Take care and thanks again for your advice, it's very much appreciated.

Originally posted by @Joe Villeneuve :

As @Edward B. and @Nina Davenport have said above, you should use this source of funding only for Flips...not holds. You need to be able to re-use these funds over and over again...to paraphrase Edard, "That is the Magic of the HELOC".

Thank you Joe for the feedback, much appreciated!

Originally posted by @Edward B. :

@Ryan O.

I have done it but I wouldn't do it again. The magic of the HELOC is being able to reuse it over and over again without having to ask the bank "mother may I?" every time. So the a HELOC is better suited to BRRRR deals or fix and flips to max its potential.

Also, HELOCs are variable rate loans so account for that in your numbers, the payment is only going to go up. And if you cannot make the payment for some reason, they will take your house to pay off the loan. Your primary residence, not the rental. Finally, once you use it as a down payment you will be tapped out again and searching for another source for the next down payment. BUT if you use it like I suggest above, then you can use it to generate down payments vice being the down payment. 

 Thank you Edward for taking the time to respond.  Your advice is appreciated.  I like the idea of using it to generate not be the down payment .  Have a good weekend!

That's fine. I'd use it where you could get the best return on investment.

That's fine. I'd use it where you could get the best return on investment.

Ryan,

You're very welcome. We are all here to share, and I appreciate your sharing your strategy as well.  There's always more to learn!

Your method sounds great.  That is a way to use it for a rental, definitely - to do the cash out re-fi.

Back then I was in "flipping" mode as I was trying to build up my working capital and only had 50K available in my HELOC. But, what you describe is a very good plan, as long, as you said, you have the extra cash should it not appraise for the LTV required by the refinancer.

Thanks for sharing!

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