New to Investing - HELOC Question

[Nick M.]

I really want to start investing in real estate, but I am finding it hard to save enough money for 20% down on a rental. Living in Portland, OR. everything is very expensive and 20% down can be a substantial amount of money. I have over 200K in equity in my primary residence and I always hear everyone talking about doing a HELOC to finance deals. I have found properties that could potentially cash flow around $800/mo after NOI. I feel that I am confident in finding good deals and have basic knowledge of what to look for in a property. My biggest issue is having cash up front to make the purchase.

I know this may seem like a dumb question, but I just want to make sure that I am understanding this correctly. These are just some generic example numbers, and I am hoping that the wonderful BP community might be able to shed some light for me.

Lets say I do a HELOC for 40k at 5%. If I am understanding it correctly, that would mean that I need to pay $2,000/mo. Obviously, if I am only cash flowing $800 of the rental purchase then I would be negative $1,200/mo. How are people using HELOC's to afford these deals and still come out in the green?

Any insight is greatly appreciated. 

[Brit F.]

@Nick M., how did you arrive at $2k/mo?  If you were thinking that the 5% rate is monthly (based on $40k), then you'll be happy to know that it's an annual charge, which means your monthly interest would be $2000/12 = $166.  But, remember that's interest-only and doesn't include principal.

If you're a new investor, be careful with HELOCs if you're planning to hold the property for a while. Identify a short-term strategy to pay back the HELOC quickly, such as refi into a loan or sell.

Calculate cashflow based on what you think your long-term financing numbers will be. If you calculate cashflow based off the HELOC's interest-only payments, you might be unpleasantly surprised when your payments go up at the end of the HELOC draw period or when you refi.