HELOC for investment property

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HELOC for investment property

Zachary Penn
Rental Property Investor · Member since 2019 · 29 posts · 12 votes

Ill try to make a long story short. After doing about 6 months worth of homework I was almost ready to jump in, currently living near Tampa, FL my family was going to sell our house with a lot of equity and make a move to Knoxville, TN and start a new life (April 2020 was the plan). With this equity we were going to start buying rentals and trying our hand out at the BRRR. Seems easy enough from the books/forums but I know you learn everything from doing/failing or succeeding. Currently have so much equity in our home because we just did a live in fixerer upper (took 8 years), but we are more than capable in doing a lot of the projects that come with this. Then everything went sideways. Talking with the agent down here, selling seems to be a challenge. I have a stay at home wife and 2 young boys (1 and 3) and we do not want to expose them to anything unnecessary for the time being (showing a house/moving ect). But who knows what the right answer is right now, seems like everyone has a different opinion. So that leads me to my real question:

I am thinking of taking a HELOC out and buying an investment property. As of right now, I do not have the cash to do this but do not want to lose excitement/motivation in the process. Looking for help and want someone to convince me why this is a good/bad idea. I completely understand the risk that comes with this but also look at the reward that can come as well. If we are stuck in place for 6months/2 years, why not get a head start on this new business plan?

Please let me know if anyone has done this and if it worked or didnt and why. Thank you everyone. 

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Michael Valerio
Wholesaler · Saint Petersburg, FL · Member since 2012 · 88 posts · 37 votes
6y

It's not a bad idea at all. The challenges will be the recent tightening of qualification standards, but if you've got some reserves, proof of decent income, and a credit score above 700, you should be fine. The rates are reasonable (mortgage rates just dropped again yesterday as an attempt to offset the standards tightening, which effects Home Equity Lines rates as well). My advice would be to do your best to find a deal that will have you all in under 80% of the After Repair Value. Doing that will (as you may already know) will avoid PMI when you refi into a permanent loan, thus satisfying your HELOC. I found this link for you to check out current HELOC rates.

https://www.valuepenguin.com/mortgages/average-home-equity-loan-rates

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  • Michael Valerio
    Wholesaler · Saint Petersburg, FL · Member since 2012 · 88 posts · 37 votes
    6y

    It's not a bad idea at all. The challenges will be the recent tightening of qualification standards, but if you've got some reserves, proof of decent income, and a credit score above 700, you should be fine. The rates are reasonable (mortgage rates just dropped again yesterday as an attempt to offset the standards tightening, which effects Home Equity Lines rates as well). My advice would be to do your best to find a deal that will have you all in under 80% of the After Repair Value. Doing that will (as you may already know) will avoid PMI when you refi into a permanent loan, thus satisfying your HELOC. I found this link for you to check out current HELOC rates.

    https://www.valuepenguin.com/mortgages/average-home-equity-loan-rates

    1Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    6y

    Welcome to BP. Your timing isn’t terrific. I just found a post from 2016 asking if they should wait for a recession to buy their first piece of property.  Well, that recession is here.

    It isn't the end of the world, in spite of prognostications to the opposite. Could you problem-solve this? Stay with family? Check into a rental? Move anyway, and leave the house for sale behind you? Move anyway...HELOC or refinance now, taking some equity, and then turn it into a rental?

    Or stay in place and use technology instead of people coming through, you can get a digital floor plan made. Then put it on MLS with a professional video walkthrough.

    1Reply
  • Ryan AllisonPro Member
    Investor · Connecticut / Massachusetts · Member since 2019 · 65 posts · 38 votes
    6y

    @Zachary Penn this is exactly what I just did for my most recent rental. I took out a HELOC on one of my properties & bought another one. This was right at the beginning of the COVID spread so my timing was horrendous and I almost backed out of the deal but ultimately decided to move forward.

    With my new rental, I'm able to cash flow with OK returns (not great) after factoring in the payment on the HELOC. The payment on the HELOC reduces the cash on cash returns but the way I look at it is some money is better than no money. I was able to get comfortable with the debt & leverage on this deal but I realize that is not for everybody.

    If I was you, I would recommend getting a HELOC on your place in Tampa. It doesn't cost much to maintain, mine is $100 per year and had no closing costs to start.

    As far as purchasing a property, I'm not sure I would jump in right now, maybe towards the end of 2020 or Q1 2021.  Again, I went in because I was under contract, but I pivoted what was supposed to be a market rate rental into Section 8 to mitigate any risk with collections in 2020.  It was a pretty easy transition so I felt OK moving forward, otherwise I would've backed out of the deal.  

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  • Eric L.
    Rental Property Investor · Royersford, PA · Member since 2018 · 25 posts · 19 votes
    6y

    @Zachary Penn I like HELOCs because they give me options. I can use the LOC for a home purchase or cover my living expenses. It can serve as an emergency fund if you are cash poor. If you expect your home's market value to drop due to the economy, then I would start the application process as soon as you find the right product for you. I would look for a low rate, interest only HELOC. I have only paid for the appraisal in closing costs. The annual fees are low as well.

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  • Zachary Penn
    OP
    Rental Property Investor · Member since 2019 · 29 posts · 12 votes
    6y

    Thank you, this all at least helps with ease of mind. There is no help for us when we move, there is no family/friends to stay with or that would be a huge bonus. And we do plan on renting our next house for a while, do not want to use all the cash we have for a down payment (opportunity cost?). We are okay giving someone else rent for a while. I think we will just apply for the HELOC and hold it and see what happens, if nothing else I'm at least acting like I am busy trying to do something productive, even if nothing comes of it I can tell myself Im doing something good?

    0Reply
  • Ruth Blue
    Realtor · Pigeon Forge, TN · Member since 2018 · 230 posts · 111 votes
    6y

    @Zachary Penn HELOC can be an awesome way to borrow against what you have to purchase more properties and build your portfolio. My mom @Rhonda Blue did that. She leveraged her CA property and borrowed 100k against equity to purchase 2 rentals here in TN. She never lets anyone forget about what she learned. 1. It was awesome to roll the money into 2 more income producing properties. 2. It was AWFUL to have her credit go from 799 to 630 in just 2 months because with a HELOC it counts against you as a credit card so if you use more then 30% which she used 100% of it. Credit Bureau considers that a bad manager of credit and your score will suffer. She quickly decided to cash out refinance and rolled the 1st and 2nd into one loan with a low interest rate. Some thing to consider only as last resort! She said that if she had to do it over again just do the cash out refinance and use the cash to purchase. No issue with credit!

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