Need Help! Possibly dug myself in a hole with Interest Only Heloc

Clint E.

Investor · Saint Charles, MO · Member since 2016 · 118 posts · 91 votes

9y

Have you considered a commercial loan? There are banks that will go as low as 15% down, some 20%, a lot 25% down. I am paying 5.675% on my commercial loan that is tied to my LLC. Interest is higher than if I'd have done it in my name, but that's business.

I personally like this line I heard once: "Interest is paid by the tenant and deducted by me."

4 Reply

Wendell De Guzman

Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes

9y

Originally posted by @Franklin Romine:

@Eric DeVito

If it was me personally I would do it. I like risk and the unknown.

Most people will just continue to watch videos, read posts, go to work and be safe and secure there whole life....

Franklin

Franklin, you're funny: you like risk and the unknown. True investing is KNOWING the risks upfront, and then having MITIGATION & CONTINGENCY PLANS in place so you will minimize the risks and know what to do if the risk happens anyway. Once you know the downsides of the investment and the returns is still worth it, then go with it.

You can make money in investing despite the risks but if you're not careful, risky investments where you don't know what you're doing will bite you in the end. Listen to my podcast and learn how I lost money on a 36-unit apartment building but once I learned from that mistake, I bought a 100+unit apartment complex with great cashflow. Here's the podcast: http://Biggerpockets.com/show65

2 Reply

Ryan Scott Isacksen

Property Manager · Castro Valley, CA · Member since 2016 · 212 posts · 110 votes

9y

I'm in somewhat of a similar position, Eric. My debt to income ratio will allow for me to do my HELOC and seems to be the path for what will work for me to be able to get into a deal.

In my mind, I am looking at the HELOC as an investor in the deal that needs a certain return. I also have experience managing the maintenance of multifamily properties to have an idea of costs that come up.

Yes it is a bit more risky since the home is on the line too. The deal has to be that much better to be worth doing.

OP

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

9y

@Ryan Scott Isacksen

Well how I look at in my case is this. I will still make my regular mortgage payments on my primary home.

The rental property home I am looking to purchase is around $35,000 which I plan to act as a "cash buyer" by using the HELCO. So I will just use the rental income to payback the Helco each month.

Loren Clive

Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes

9y

Talk to Quicken. They offer better terms (no annual fee, lower interest rate, rolled-in closing costs) than you are getting. I pay under $200/mo interest only for $50k HELOC but I am a Schwab Bank preferred customer, meaning I have at least that much money in bank/401k.

I employed the same strategy recently and it worked out great, BUT property values are much higher in HI $500k.

Whenever you borrow, make sure you have a payback strategy. The investment property you are buying better cashflow, which it should since you're buying it cash. Calculate your payback on the HELOC via rent income. Should not be more than 10 years.

Don't tell the banks you're buying another property with the HELOC. Red flag! Say you're improving your current residence. It's none of their business what you use the money for.

OP

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

9y

@Loren Clive

Great tips Loren. So just to clarify. When I apply for a HELOC, do not mention it is for a "investment propoerty". Just say its for renovations for my current house basically. Correct?

Ryan Scott Isacksen

Property Manager · Castro Valley, CA · Member since 2016 · 212 posts · 110 votes

9y

You will limit the banks that will work with you if you are up front that it is for investment property. I was honest about what I planned to do, though the HELOC application hasn't fully closed yet.

Make sure you factor vacancy into your consideration and turnover costs. Is that a single family house to use as a rental or a small apartment building? Does the place already have a tenant or tenants in place?

OP

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

9y

@ Ryan

@Ryan Scott Isacksen

It's a SFH. Some I am interested in are tenant occupied. Other properties my RE Agent is sending me that do not have tenants but he believes are good investment properties. Just trying to secure the financial side of things before I take a drive to the area to check out some homes and the neighborhood.

Kate Weinberg

Investor · Park City, UT · Member since 2016 · 46 posts · 15 votes

9y

Hi Eric,

I may have missed something here so anyone pls feel free to correct...but just a thought...

Could you just get a HELOC (the kind where you only pay interest for the 1st 10 years) on your primary for 75 or 80% LTV (which would be 42,500-58K). Use the HELOC funds to purchase the investment property.

Then, after 6 months seasoning of the investment property, go apply for a cash out refi on it. This would throw a 30 yr. mortgage on it (at investor rates ~4.5% currently). You can then pay off that volatile HELOC. This assumes however that you have some equity in that investment house you purchased so that there is enough equity to pay off the heloc....Either as a result of you buying at a discount or it was distressed and you fixed it up to increase the value....is this the case?

I say this scenario because it is exactly what i am hopefully about to do on a new property as well as some other owned properties. Cycling of capital....

Podcast Guest on Show #243

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

9y

A HELOC can work for what you want to do, but you want a stand-alone loan not connected to your mortgage, or you want to refinance everything together to access your equity. Your only problem here is that you're not going to be able to access that cash again after you buy, if your DTI is already high enough that you were turned down for a HELOC by one bank. That means you're already close to the edge. Ideally, you would access your equity, buy a house, season the house, refi & pull your cash back out of the house, and either rinse and repeat, or if you only want one house, pay the HELOC off.

Skyline Properties

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OP

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

9y

@ Kate

@Kate Weinberg

Yes Kate, that is what I am going to look into. Going to just leave my existing mortgage as is on my primary home. So as I mentioned the property I'm looking into is only around $35,000 so I would just act as a cash buyer using the Helco and buy it out right. Then using rental income to payback Helco payment

OP

Staten Island, NY · Member since 2015 · 265 posts · 59 votes

9y

@JD Martin

Great response. So ideally that is what I am thinking about as well. How can I keep using the Helco to repeat the process so I can acquire more homes? My DTI is already cutting it close. As I mentioned I would pay this investment property outright via the Helco due to the purchase price only being around $35,000. I would assume I could repeat the process again then but I would have to make Helco payments.Thoughts/advice?

Kate Weinberg

Investor · Park City, UT · Member since 2016 · 46 posts · 15 votes

9y

yes great. However, what i am suggesting is to get rid of that HELOC tied to your primary home after 6 months as it is 1) tied to your personal home! 2) volatile and who knows with new administration whats going to happen to rates. The way i suggested means you mitigate the aforementioned 2 risks by taking out a separate 30 yr mortgage on that new investment property. Granted, higher rate and some closing costs to take out new 30 yr mortgage but I don't like having a long term commitment tied to my HELOC.....I would not use a a HELOC for buy and hold for anything over 6 mos-1 yr MAX. Im usually more like 3 mos for flip and out.

Mike CumbieBusiness Member

REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes

9y

@Eric DeVito,

I can get you 2 maybe 3 properties in this area for 37K. If you want to dig into your funds a bit more I can get you 4 maybe 5. I will bet I can get a few owners to carry the mortgage for 5K down on many of them. That being said.... I would not spend one cent on any of them myself. I would never recommend any of my clients to touch them and if they wanted to... I would follow my regulations and do the best I could do for them and follow their requests. Once closed I will hope they do well.

Your agent has tried to back you away, your bank has tried to back you away. People in the industry have said "no, not this one". Certain properties bring certain results. What is a dog bite going to cost? What is a "bad water pipe" going to cost you? Attach it to your home, attach it to your families well being. If you chose to put 37K into a piece of a 20 unit building.... you will get lower returns, but it may be safer.

I wish you the best!

Loren Clive

Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes

9y

@ericdevito

Yes. Happy investing!

Kurt Gardner

Investor · Maryville, IL · Member since 2016 · 129 posts · 81 votes

9y

@Eric DeVito you have heard some good advice here, and ultimately, you are right about it being a decision you need to make. The suggestions are given, in many cases, having made some unwise choices personally or having seen them made. Nobody here has any vested interest in your failure or success except that with your success we can all celebrate with you...with failure, we all are sad and wish we could have given you advice before you stepped off the ledge.

I have been tempted to use a HELOC in the same manner, and i have resisted because where i live is not worth risking. I do not want to end up financially busted in my investments AND homeless. Investments are investments, and expenses are what you pay to live comfortably...do not mix them.

In an almost contradictory position, I am planning to use a HELOC (3.5% no costs and only taking my LTV on my primary to 65%) to pay down some very high interest payments. After four years of leveraging and pushing to grow, this next year we are pulling back - ignoring the desire to buy more and eliminating some liabilities. I won't be paying any less each month on my expenses, but i will be reducing the principle on what i owe much faster.

By my calculations, within a year, we will be able to use cash again for our next few purchases, be in a much better debt to income ratio, and still have the availability to use a significant amount of the HELOC if necessary (all my numbers have us paying off the HELOC within 18-24 months using the same amount of money I'm paying monthly right now, just more efficiently).

I know it might seem contrary. In my world, I see the value of the HELOC as a debt reduction strategy, not an investment strategy, and it makes sense in my situation. After you get a couple properties under your belt, you can leverage them (if you buy right), and that is a much more secure and stable platform to build your business.

I hope you do well, and I look forward to hearing your success stories!

Cindy Jones

Investor · Enid, OK · Member since 2016 · 10 posts · 1 vote

9y

A lot of lenders don't like loans under $50k. I don't think they analyzed your deal and said too risky, won't make you money. You can try smaller banks/credit unions. They are more likely to give you a loan for less than $50k. I have bought two sub-$50k houses, but I buy, owner-occupy, fix them, and then move out and rent then. The Midwest has lower house prices in general, so a sub-$50k house may not be a huge mess located in a ghetto. My first investment house was $18k, roofing $3500, kitchen about $2k, plus sweat equity. Today it rents for $750/month w/o utilities or $900 with utilities, it's paid off, and worth about $45k. This is not a horror story. It can be done. However, you really really have to know the area where you are going to buy investment property in. If I'm not comfortable living there, I'm not buying there. That's my personal risk tolerance and involvement with each house so far.

Best of luck to you.

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

9y

Wow, lots of posts in this thread and nobody has demonstrated the correct math in how the max credit line amount for the OP's HELOC gets computed. So let's demonstrate how those numbers come to be.

So the OP states 310K as the expected appraised value of the property. The lender will do some percentage for the Combined Loan To Value (CLTV); although on a primary residence there are lenders that go as high as 90%, the OP seems to be getting a CLTV of 80%. So, the lender will allow a total of all loans to be 0.8 x 310K, or 248K - that is the first number to be computed. Now, how much loan balance remains on the OP's first mortgage is definitely not going to be 190K as the OP posted - 14 months into a 30 year loan, hardly any of the loan balance has been paid down since interest is the biggest payment component in the earliest years; somebody else posted a more correct loan balance of more like 201K and that is what I will use here. The loan amount of the HELOC then becomes 248K - 201K, or 47K. Now that is the maximum that the OP would be able to draw from this HELOC, but depending on what the OP does that full amount might never be drawn all at once, or it could get maxed out and stay that way even; the monthly payment will be set by the amount drawn and the interest rate in effect during that month - no need to do the math on that with all the hypotheticals involved.

That's all for now.

Christopher Blanco

Real Estate Consultant · Cleveland, OH · Member since 2016 · 511 posts · 345 votes

9y

I guess my strategy is a little different. I plan on using HELOC on my primary to cover carrying costs for flipping. After I sell the flip, the HELOC gets paid back, and I will use the profits from the first flip AND the HELOC to do two more. Each time I pay the HELOC back and start over. After I do 4-5, I won't need the HELOC anymore as I will have enough cash to carry my properties. Maybe you should start off this way? My plan is once I have built enough cash in flipping, and the market cools a little, I will invest in buy and hold.

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

9y

So the other thing to add is the actual present value needs to be established rather closely before even considering doing this. Since the other numbers in the OP come into question, I will make a possibly incorrect assumption here that the expected appraised value is wrong, just to illustrate why knowing that is so crucial.

The OP bought for 255K, so placing the value at 310K after 14 months is roughly a 20% appreciation; maybe that market did that, but maybe that did not happen. What if appreciation was closer to 10%, setting value at 280K for purposes of illustration? So CLTV is still 80% from his HELOC lender; that means that combined loan total will be allowed to be a maximum of 224K, and with that roughly 201K left on the first loan you will only get 23K available to draw on that HELOC - less than half of the previous amount I calculated in my earlier post.

When it comes to HELOCs, you have to understand how the math works, AND you have to actually do the math, and your expected appraised value needs to be accurate; if your expected appraised value cannot be pinned down, then set up the various scenarios for ranges that you might think it will fall into.

Finding a lender that will go to a higher CLTV always helps too ;)

Aly W.

Investor · Middletown, NJ · Member since 2008 · 2k+ posts · 1k+ votes

9y

We used TD Helocs to start buying rental properties at the bottom of the crash. We have 4 Helocs through them, plus traditional mortgages elsewhere. TD offered the Helocs 5 years ago for what sounds like similar terms to yours - interest only for 10 years, fairly low rate, annual maintenance fee, app fee, etc.

What you need to keep in mind is that the 10 year interest only period is reviewed at the 5 year mark. At least it was/is for ours. And at that point, depending on how many other loans you have, they will not renew the interest only payments for the second 5 years and you'll have to start paying P&I.

We refi'd out of one of them with a credit union Heloc at better terms (P&I) when TD re-set it. One was renewed by TD for another 5 years at interest only, one was always P&I, and one was recently re-set to P&I. We're looking to refi that one somewhere else.