Taking a HELOC for 2nd home/move-up home (SF Bay Area)

9 Replies

Hi guys, newbie here but I've been watching a few youtube videos and a boss actually recommended the Bigger Pockets PodCast and the world of real estate investment has mesmerized me and I thought I'd pose the question you see in the subject line above, I'm wondering if its feasible to buy a move-up property using a HELOC and renting out my current condo that I live in here in the SF Bay Area.

I figure I'd start small with just renting out my condo and seeing how that goes. But a little about my situation:

I Bought a new 1 bedroom condo in 2012 here in San Jose for $360K. In the 6 years of ownership, the area around it developed and has greatly appreciated. 1 bedrooms currently are selling for around $800-$825K (rough numbers from Redfin/Zillow). Mortgage+HOA is $2000 combined. Local Rentals and new luxury apartments are renting for $3200 a month for something of similar square footage. People renting out their condo in my complex is also around $2800+ being so close to shops like Target and Trader Joe's...and rumors of google moving in next door and being next to a major transportation HUB, the prices are justified here in Silicon Valley.

So my question is, is it a bad idea or is it even possible to obtain a HELOC to obtain a 20% down on a new "move-up" home? While I would ideally like to stay in San Jose but new townhomes start at $950K+ and older homes and even fixer uppers have bidding wars and I just don't want to deal with that for a "move-up" home. While I know people will suggest investing out of state, I am looking for an upgrade property for myself while renting out my Condo because its in such a prime location, I would HATE to sell just so I can buy. I mean, Bart and High Speed Rail is also making its way to where my condo is located.

With that said, I am thinking about moving up to Oakland CA where properties are also appreciating but not as fast as San Francisco or San Jose. A home I am looking at starts at around $759K. I just want to make sure I am not getting in way over my head. It's super risky but thought I'd ask. While people talk about the next big bust coming, this was said on another forum in regards to the SF Bay Area:

"Economic growth here will outpace all other metro areas in the US with the exception of maybe Seattle (which will tie I think). Monopolistic software companies like facebook, google, uber, etc. will suck in revenue from all over the world and funnel that cash into the pockets of bay area landlords. They're now so big and have such powerful network effects, AI & huge data sets, that pretty much nothing can stop them at this point aside from gov't regulation."

So any thoughts and opinions are MUCH appreciated! 

From a mortgage perspective this is totally doable. 

I agree with your inclination to keep the condo. On top of the fact that you have some little baby $300k mortgage on Silicon Valley real estate, there's a little thing in California called Proposition 13 which makes long-term ownership of residential real estate tax advantaged. I personally don't think I'll ever sell California real estate, only buy. 

People talk about the "next big bust" like 2008-level implosions happen all the time. It's more like once a century... 1929 and 2008. But even if history were to somehow exactly repeat itself, consider people that purchased in Oakland in 2007. Some defaulted, some walked, etc, and others sucked it up and kept making their payments because they realized that being "under water" only matters if/when you go to sell. So, don't sell when values are down (& I will now take my rocket scientist boy scout badge please). Problem solved. No one ever said "sell your stuff when the value is lowest" was a good strategy anyways. Compare home values in Oakland in 2007 to 2017 -- if your "worst case" scenario is holding for 10 years and seeing that kind of appreciation, is that really the end of the world? 

@Roger Chan definitely possible. How much do you owe on your condo, $200k? $250k? 

If your condo is worth $800k, and you only owe $200k, you have a ton of equity and will easily be able to find a local lender to offer a HELOC for $400-500k, as long as your current income and DTI (debt to income ratio) will allow it. Today's rates around 6%, adjustable.

That money can be used for anything... but use it wisely. Buy another investment or your new primary townhouse, not a vacation or a new car. 

@Roger Chan , been there done that and got the T-shirt. Both @Chris Mason and Account Closed are correct, this is a totally viable strategy. In my case the appreciation in my primary allowed me to buy a 6 plex in the Fruitvale area of Oakland. I wrapped my original principle mortgage into the HELOC so I don't have a conventional loan on my primary any longer. The rents more then pay for the HELOC principle and interest, covering both properties! That is the power of appreciation and increasing rents. But if you go down this road, keep what Saj said at the front of your mind, "that money can be used for anything... but use it wisely. Buy another investment or your new primary townhouse, not a vacation or a new car. "

Originally posted by Account Closed:

@Roger Chan definitely possible. How much do you owe on your condo, $200k? $250k? 

If your condo is worth $800k, and you only owe $200k, you have a ton of equity and will easily be able to find a local lender to offer a HELOC for $400-500k, as long as your current income and DTI (debt to income ratio) will allow it. Today's rates around 6%, adjustable.

That money can be used for anything... but use it wisely. Buy another investment or your new primary townhouse, not a vacation or a new car. 

I wish I owed $200-$250K but my loan principle is around $320K. And for sure - I'd use it wisely such as a "move-up/upgrade home" but again, that's if I qualify. Wells Fargo did a "rough numbers" run over the phone and suggested I sell to buy or I'd have to come up with 35% down to make it all viable. But again, we played with rough numbers on the phone. I guess it all comes down to that DTI ratio...

@Roger Chan Wells, or any bank, will want those funds “seasoned”, so they’re going to give you biased advice. 

What you need to do is 2 separate transactions - 

1) a HELOC from a smaller bank or credit union. Once approved, transfer the funds to your Checking account, wait 2 months then you're free to

2) buy a property with that money as a down payment

If I were you, I'd max out the HELOC and buy 2 properties, an investment and a primary, ensuring the cash flow from the investment pays the HELOC payment.

Be careful with this debt. Leverage is very powerful if used properly. It can also sink you. 

Originally posted by Account Closed:

@Roger Chan Wells, or any bank, will want those funds “seasoned”, so they’re going to give you biased advice. 

What you need to do is 2 separate transactions - 

1) a HELOC from a smaller bank or credit union. Once approved, transfer the funds to your Checking account, wait 2 months then you're free to

2) buy a property with that money as a down payment

If I were you, I'd max out the HELOC and buy 2 properties, an investment and a primary, ensuring the cash flow from the investment pays the HELOC payment.

Be careful with this debt. Leverage is very powerful if used properly. It can also sink you. 

Hey Saj - Quick note, Wells Fargo might have hidden overlays saying otherwise, but in general you can use HELOC funds for down payment, cash to close, reserves, etc, without seasoning it, or hiding it, or anything else. Secured borrowed (f. ex HELOC) funds v unsecured (f. ex credit card or informal buddy loan). Hard money loans are also generally secured, and private/interpersonal loans can be made to be secured with a notary and recording at the county so it's official. 

Fannie Mae actually explicitly uses artwork and collectibles as examples of collateral you can borrow against for a down payment, not just real estate, but I've so far not tried to be a smart alec and use a smiley face drawn on a napkin as "artwork" collateral. If/when I do try to pull that one off I'm sure it'll be a BP person, and it'll be someone experienced, and not a noob, that understands the risks. For OP purposes, I'd suggest sticking with a HELOC secured by real estate. This is the same exact guideline that lets 401k loans be used, since that is a financial asset.

Not sure if you have a crazy low rate on your current mortgage now. But if not, is there a reason why you wouldn't just re-fi the condo and cash out the equity? HELOCs are variable interest loans and have higher rates than a owner occupied mortgage. As long as the market rents covers the expenses, it shouldn't affect your DTI when you go buy your new house down the line.

@Roger Chan   Based on what you shared, my inclination (like @Chris Mason ) would be to hold and rent making some $$.

It sounds like you should have enough equity in the condo to refi or HELOC. Note, when taking out a HELOC, it will count against your DTI ratio even if you have not used it. Most lenders will compute a minimum payment assuming it was fully utilized. Best to work with someone like @Chris Mason or another mortgage broker to get exact numbers.  I rarely find the "big" banks to have the best rates and/or flexibility.

Originally posted by @Roger Chan :

Hi guys, newbie here but I've been watching a few youtube videos and a boss actually recommended the Bigger Pockets PodCast and the world of real estate investment has mesmerized me and I thought I'd pose the question you see in the subject line above, I'm wondering if its feasible to buy a move-up property using a HELOC and renting out my current condo that I live in here in the SF Bay Area.

I figure I'd start small with just renting out my condo and seeing how that goes. But a little about my situation:

I Bought a new 1 bedroom condo in 2012 here in San Jose for $360K. In the 6 years of ownership, the area around it developed and has greatly appreciated. 1 bedrooms currently are selling for around $800-$825K (rough numbers from Redfin/Zillow). Mortgage+HOA is $2000 combined. Local Rentals and new luxury apartments are renting for $3200 a month for something of similar square footage. People renting out their condo in my complex is also around $2800+ being so close to shops like Target and Trader Joe's...and rumors of google moving in next door and being next to a major transportation HUB, the prices are justified here in Silicon Valley.

So my question is, is it a bad idea or is it even possible to obtain a HELOC to obtain a 20% down on a new "move-up" home? While I would ideally like to stay in San Jose but new townhomes start at $950K+ and older homes and even fixer uppers have bidding wars and I just don't want to deal with that for a "move-up" home. While I know people will suggest investing out of state, I am looking for an upgrade property for myself while renting out my Condo because its in such a prime location, I would HATE to sell just so I can buy. I mean, Bart and High Speed Rail is also making its way to where my condo is located.

With that said, I am thinking about moving up to Oakland CA where properties are also appreciating but not as fast as San Francisco or San Jose. A home I am looking at starts at around $759K. I just want to make sure I am not getting in way over my head. It's super risky but thought I'd ask. While people talk about the next big bust coming, this was said on another forum in regards to the SF Bay Area:

"Economic growth here will outpace all other metro areas in the US with the exception of maybe Seattle (which will tie I think). Monopolistic software companies like facebook, google, uber, etc. will suck in revenue from all over the world and funnel that cash into the pockets of bay area landlords. They're now so big and have such powerful network effects, AI & huge data sets, that pretty much nothing can stop them at this point aside from gov't regulation."

So any thoughts and opinions are MUCH appreciated! 

I did the exact same thing here in San Diego in 2017. Used a HELOC on my SFR I purchased in 2010 to put a down payment on a new primary home for myself and family to move into. Rented out the prior home I had in Escondido which more than pays for my HELOC payment. Added bonus was I had no payments for the first 6 months my HELOC was open. Good Luck to you!