HELOC Strategy to build capital - does this make sense?

4 Replies

Hello BP Community!

I am 2 weeks from closing on our first property. We are purchasing it owner-occupied through conventional financing. As always, we believed we got a good deal. However, as we dug deeper, we are concerned about the tax implications if we pursue our original plan to flip as soon as we can. Our goal is to have 2 rentals by the end of 2020.

After researching and listening to some of the amazing BP podcasts, I had an Idea. I would love anyone's opinion whether the strategy below is doable and if it makes sense to expedite our investing.

Purchase Price: $285K (5% down, loan approx. $270k)

Rehab: $50k

ARV: $400k

Our goal is to use this property to build capital to get into rentals. I hate to wait the 2 years to be tax free on this sale, but understand we don't have great margins either. SO...

If our appraisal comes in around $400k as I hope. Could I then use a HELOC to turn our forced equity into capital and use that to purchase our first rental? With these numbers, I think I could pull out $90,000, (90% of ARV = $360,000. minus $270k,000 loan). In my head, if we were to profit $40k after our rehab costs I would be thrilled! Knowing that a lot of that will be eaten away by commission, closing, taxes, etc. Could I just pull it out as a HELOC and use that money instead? We could then stay in the home until the HELOC is paid down and we are past the 2 year window. I understand I will be paying for this money and it won't be straight profit, but it seems like a good plan to get the capital as soon as I can.

Does this make sense? Is this doable? Would love your advice! - Thank you.

This seems good to me - are you sure that you can get 90% loan to value on the HELOC?

This could work as a classic BRRRR, where you refi and pull out cash that way. If you did that, you'd pay no interest on the cash you pulled out.

@Clark Kirkpatrick Thank you for your input. I haven't gotten any commitments, but there are credit unions and other small banks that advertise 90% in my area. We actually have a small credit union that advertises 100% LTV, but is more expensive and I would need to dig in whether it is worth it.

I don't think I can BRRRR this property because i will have a conventional loan with small money down. I will still owe $270k - $260k on the loan. I was under the impression I could not use that strategy if I have little equity in the home.

@Michael Peters I am very interested to hear how this turns out for you. I am not quite in the same situation. I purchased a rental duplex with A private money lender which is listed on the mortgage. With some rehab, I am hoping to pay off the original loan and then take some money away to purchase a 2nd rental. My plan was to find a cash out refinance where from what I gather I could get 80% of the home’s value so I’d pay off the original mortgage and have cash due to the rehab causing an increased value. Would this work for you because you’re value would increase drastically because of your rehab?

@Chris Courteau , I was born in Buffalo - love it there. Good luck with your investing! As for the refi - I am not sure in my situation. I am halfway through the BRRRR book, but I am under the impression that with my conventional 5% down load, a refi wouldn't make sense since I will have such a heavy loan amount early on. The forced equity we are hoping to add isn't even 50% of my original loan amount. This is why i was thinking the HELOC strategy could be a good one.

I may need to look into Refi some more, does it matter how much equity you have in the deal to Refi, Does anyone know if it would work in this case or not?