getting a HELOC on investment property the Refi into DSCR
Richard PastorPro Member
Investor · Portland, OR · Member since 2024 · 13 posts · 3 votesgetting a HELOC on investment property the Refi into DSCR
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Bryan MaddexBusiness Member
Lender · Charlotte, NC · Member since 2015 · 160 posts · 76 votesHey @Richard Pastor
First, lets address some incorrect information that is stated above. HELOCs are NOT sensitive to the 10 year treasury. It has ZERO impact on your heloc rates. Helocs are driven by the Prime Rate which is 3% above the Fed Discount Rate. Prime is currently 7.75% and likely to drop by 1-3% during this fed cut cycle over the next 1-3 years. The Fed has already cut the Discount Rate twice, and there is over a 60% odds that they will cut again in December. (Google Fed Futures and click on the CME Group tracker). The fed is likely to cut a number of times next year, and possibly the year after as well. Your Heloc rates should fall for the next year or two.
Next, as stated above, a DSCR loan cannot be in 2nd lien position. You should refinance your long term debt into a DSCR loan and then do a heloc on your property. With 700+ credit you should be able to get mid to high 6s if you pay a couple points and do a 5 year pre payment penalty. If you do a cash out refinance, you may be in the high 6s or low 7s.
Helocs are great for short term debt! Not so great for long term debt as you will pay Prime+4% or so on a heloc on your investment properties. I love having access to capital, that equals access to opportunity.
Let me know if you want to talk in details about more strategies to utilize your equity and congrats on this property!
11 Replies
- 1yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Richard,
Due to higher rates a HELOC can sometimes be a financial burden and a deal killer down the road. The 10 Year Treasury is back up over 4.20% which pushed rates back up and HELOC rates even higher. A HELOC carries a higher rate over a shorter amortization usually 10 or 15 years and a mortgage carries a lower rate over a 30 year amortization offering a lower payment.
You have to run the math in each scenario because the math differs based on a few things like Fico score, CLTV, Loan size, and time frame between purchase and refinance of new property. Usually a primary home is going to offer the best option to borrow against for higher LTV/CLTV, lower rate, and less fee's (No points). A Heloc can never be used as a PITI reserve, or an asset instead its a debt burden and an additional trade line on credit.A Heloc carries a higher risk when it comes to security meaning if you miss a payment even by mistake or for any reason, your scores drop, or your balances start to change your DTI or usage percentage. The bank or lender holding the Heloc can and will close your line of credit or cut it in half with zero notice.
On the other hand a cash out refinance offers a lower rate over 30 years so lower payment, offers cash in the bank which can be used as PITI reserves or assets needed when buying more rental properties. It also is Tax free and cannot be closed or reduced once its in your account.
A Heloc is nice if you want to use a small amount and then have a small payment but a Heloc is meant for small projects and maintenance. The biggest thing to consider is 85% of all people who take out a Heloc will eventually do a cash out refinance in 3 years to consolidate it anyways. If you take the cash out through a refinance you avoid having to refinance again in 3-5 years.
I see a lot of investors get stuck with high DTI issues when trying to use a Heloc to buy another property versus a cash out refinance.
- Lender · NY · Member since 2024 · 32 posts · 11 votes1y
Quote from @Richard Pastor:
Hi all
I have a strategy question for you all. I have purchased a 4 plex with hard money as well as used my HELOC from primary residence. I did a cash out refi on another investment property. The investment property is now in a LLC. I used that money to pay off the HELOC. I will use the rest to pay off about half of the hard money loan for the 4 plex as well as finish the rehab. After the rehab the ARV of the 4 Plex should be around 650k and I will owe the hard money lender about 160k. What I would like to do is get a HELOC on the 4 Plex then Refi into a DSCR loan. The DSCR loan will likely be in my LLC. Due to the low amount I will owe to the hard money lender I want to get a HELOC to find and fund other deals but when I am not actively doing deals I want the cash flow. This is why I dont want to refi the max amount. Is this possible or am I just dreaming?
Yes its possible
- Investor · Portland, OR · Member since 2024 · 13 posts · 3 votes1y
Jason
Thank you for the reply. I would not use the HELOC as a mortgage. I would use the HELOC to purchase a depressed property and then rehab it. So I would only need the cash for less than a year. With hard money loans being around 2 points and 12% it would be cheaper to use a HELOC to pay cash for the property and would not need to pay the points. Then once the rehab is complete and rented I would refi into a DSCR loan where your DTI is not factored in. I could also use the HELOC for fix and flips as well. Then when I am not actively doing deals I would have more cash flow from my properties due to the zero balance on the HELOC.
- Rental Property Investor · Bow, NH · Member since 2016 · 216 posts · 185 votes1y
@Richard Pastor
I would urge you to get a commitment from a lender on a heloc BEFORE going down this path. In my experience in this market almost no one is doing them. If they are, it will be expensive and / or require SIGNIFICANT equity. I wouldnt want to see you get to the point of needing the heloc and finding out it isn't feasible. Make sure the lender knows this is an investment. That usually ends the conversation.
- Investor · Portland, OR · Member since 2024 · 13 posts · 3 votes1y
Quote from @Dan Thomas:
@Richard Pastor
I would urge you to get a commitment from a lender on a heloc BEFORE going down this path. In my experience in this market almost no one is doing them. If they are, it will be expensive and / or require SIGNIFICANT equity. I wouldnt want to see you get to the point of needing the heloc and finding out it isn't feasible. Make sure the lender knows this is an investment. That usually ends the conversation.
Hi Dan
I know my bank does HELOCs on investment properties. I will also have about 450k in equity. I was quoted 11 percent for a investment property the last time I checked. As I stated before a hard money loan is about 12 percent with 2 points. I just dont see the point of going hard money when I can borrow from my HELOC.
- 1yJay HurstBusiness MemberLender · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
Quote from @Richard Pastor:
Quote from @Dan Thomas:
@Richard Pastor
I would urge you to get a commitment from a lender on a heloc BEFORE going down this path. In my experience in this market almost no one is doing them. If they are, it will be expensive and / or require SIGNIFICANT equity. I wouldnt want to see you get to the point of needing the heloc and finding out it isn't feasible. Make sure the lender knows this is an investment. That usually ends the conversation.
Hi Dan
I know my bank does HELOCs on investment properties. I will also have about 450k in equity. I was quoted 11 percent for a investment property the last time I checked. As I stated before a hard money loan is about 12 percent with 2 points. I just dont see the point of going hard money when I can borrow from my HELOC.
I do not understand what you mean when you say above
"What I would like to do is get a HELOC on the 4 Plex then Refi into a DSCR loan. The DSCR loan will likely be in my LLC."You would need to do this in the reverse order as you will not be able to get a DSCR fixed rate in second position after taking out the HELOC.
Hurst Real Estate, INC4.991 Reviews - Investor · Portland, OR · Member since 2024 · 13 posts · 3 votes1y
Quote fro:
Quote from :
Quote from :
@Richard Pastor
@Jay Hurst would they let me open a HELOC on an investment if it has a DSCR loan in a LLC?
- 1yKo KashiwagiPro MemberLender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
Hi Richard,
Since you're paying off the HELOC on the primary, wouldn't you be able to use that HELOC on your primary for the next deal?
You could get the DSCR on first and if your bank allows it do a second position HELOC on the investment property (this would be pretty rare if a bank allows this) but putting DSCR on second would not be ideal. Second position DSCR does exist but rates are even worse than HELOANs, I'd expect 11-13% right now.
Getting a simple cash out refinance sounds like the simplest option, but if you can just get a large first position HELOC only that would be a pretty convenience deal.
- 1yBryan MaddexBusiness MemberLender · Charlotte, NC · Member since 2015 · 160 posts · 76 votes
Hey @Richard Pastor
First, lets address some incorrect information that is stated above. HELOCs are NOT sensitive to the 10 year treasury. It has ZERO impact on your heloc rates. Helocs are driven by the Prime Rate which is 3% above the Fed Discount Rate. Prime is currently 7.75% and likely to drop by 1-3% during this fed cut cycle over the next 1-3 years. The Fed has already cut the Discount Rate twice, and there is over a 60% odds that they will cut again in December. (Google Fed Futures and click on the CME Group tracker). The fed is likely to cut a number of times next year, and possibly the year after as well. Your Heloc rates should fall for the next year or two.
Next, as stated above, a DSCR loan cannot be in 2nd lien position. You should refinance your long term debt into a DSCR loan and then do a heloc on your property. With 700+ credit you should be able to get mid to high 6s if you pay a couple points and do a 5 year pre payment penalty. If you do a cash out refinance, you may be in the high 6s or low 7s.
Helocs are great for short term debt! Not so great for long term debt as you will pay Prime+4% or so on a heloc on your investment properties. I love having access to capital, that equals access to opportunity.
Let me know if you want to talk in details about more strategies to utilize your equity and congrats on this property! - 2dErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
It sounds like you will need to payoff the 1st via a rate and term refi and take out a HELOC in 2nd position. There are 1st position HELOCs however, they generally are allowed on free and clear properties. Some smaller banks may allow you to payoff the 1st lien, but may require some digging and research.
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