Using HELOC on first purchase.

Pittsburgh, Pennsylvania
Buying & Selling Real Estate
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Using HELOC on first purchase.

Joseph Pilolli
New to Real Estate · Youngstown, OH · Member since 2023 · 5 posts · 2 votes

Hello all! 

First time investor looking for a little advice. Getting into rental real estate investing has been on my mind for about a year or so and I’ve been consuming books, podcast, etc. I feel like I have my head wrapped around it enough to get started and get more education on the job. 😁

My biggest dilemma is the initial investment for the down payment on the first property. I have a 9 to 5 which I plan on keeping, so all money earned from cash flow will be reinvested and saved to be used on the next property. I am not necessarily trying to replace my 9 to 5 simply retire earlier than 65.

I am 42 years old and I would need at least a year, if not two to save up the extra money needed for a down payment. I do not plan on discontinuing my monthly contributions to my investments in the stock market, nor want to pull any money from existing investments. However, I will be curious to hear if any of you believe that’s a better idea than the below strategy.

I say all of the above to say this. Has anyone used their existing residence equity (Their HELOC) as the down payment on an investment? If so, what strategy did you use to pay off your HELOC as quickly as possible? The way my HELOC was written, it is a minimum monthly payment of interest only. That gives me a little bit of peace of mind in case my property stays vacant for a little bit while I get it ready, but I also don't want my primary residence to be on the line for too long.

Any advice would be greatly appreciated!

Thank you!

Joseph

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Jay ThomasPro Member
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
2y

Using a HELOC for Down Payment-Yes, it's an option.Some investors leverage a home equity line of credit (HELOC) to use existing home equity for investment property down payments. However, it demands strategic and cautious handling.The advantage lies in accessing capital without selling existing investments, but the risk involves putting your primary residence on the line if you can't meet the loan obligations.A HELOC should not be your primary choice, as it carries more risk than a traditional mortgage with higher interest rates.Considering your stable income and disciplined approach to investing, focus on saving for the down payment. This minimizes risk and establishes a robust foundation for your investment journey.

[email protected]832-889-5607
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  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Joseph Pilolli

    hello.  are you in Pittsburgh, and looking to buy in Youngstown?  Or vice versa?

    here's a short answer. if you use a HELOC as a down payment, and finance the rest... you're likely not going to make any cash flow; you'll probably be negative every month.  so, you'll be paying off the interest on the HELOC with your own cash, and then hopefully the property will support the other loan.  you're effectively subsidizing the investment.

    one way to pay everything off would be with a BRRRR. however, even with a BRRRR you would need an absolute home run since you're financing 100%. and if you have a busy day job, that would be tough - home run BRRRRs are difficult.

    2Reply
  • Jay ThomasPro Member
    Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
    2y

    Using a HELOC for Down Payment-Yes, it's an option.Some investors leverage a home equity line of credit (HELOC) to use existing home equity for investment property down payments. However, it demands strategic and cautious handling.The advantage lies in accessing capital without selling existing investments, but the risk involves putting your primary residence on the line if you can't meet the loan obligations.A HELOC should not be your primary choice, as it carries more risk than a traditional mortgage with higher interest rates.Considering your stable income and disciplined approach to investing, focus on saving for the down payment. This minimizes risk and establishes a robust foundation for your investment journey.

    [email protected]832-889-5607
    2Reply
  • Joseph Pilolli
    OP
    New to Real Estate · Youngstown, OH · Member since 2023 · 5 posts · 2 votes
    2y
    Quote from @Nicholas L.:

    @Joseph Pilolli

    hello.  are you in Pittsburgh, and looking to buy in Youngstown?  Or vice versa?

    here's a short answer. if you use a HELOC as a down payment, and finance the rest... you're likely not going to make any cash flow; you'll probably be negative every month.  so, you'll be paying off the interest on the HELOC with your own cash, and then hopefully the property will support the other loan.  you're effectively subsidizing the investment.

    one way to pay everything off would be with a BRRRR. however, even with a BRRRR you would need an absolute home run since you're financing 100%. and if you have a busy day job, that would be tough - home run BRRRRs are difficult.

    That’s good advise. I’m trying to start quicker than I probably should and needed this advice. So basically if I’m understanding you correctly, your saying a way I could potentially use my equity is as the down payment on a BRRRR as long as it’s ARV was large enough to get my HELOC money back after refinancing?
    if that is the case, do you believe that the saved cash flow after the renovation and normal expenses/emergency funds, etc. would be enough to gain a down payment on the next property within 1-2 years? Or is that why you are saying I would been an absolute home run on the first BRRRR I find?
    also, I am in Youngstown looking to have my properties be somewhere between Youngstown and Pittsburgh. 
    0Reply
  • Joseph Pilolli
    OP
    New to Real Estate · Youngstown, OH · Member since 2023 · 5 posts · 2 votes
    2y
    Quote from @Jay Thomas:

    Using a HELOC for Down Payment-Yes, it's an option.Some investors leverage a home equity line of credit (HELOC) to use existing home equity for investment property down payments. However, it demands strategic and cautious handling.The advantage lies in accessing capital without selling existing investments, but the risk involves putting your primary residence on the line if you can't meet the loan obligations.A HELOC should not be your primary choice, as it carries more risk than a traditional mortgage with higher interest rates.Considering your stable income and disciplined approach to investing, focus on saving for the down payment. This minimizes risk and establishes a robust foundation for your investment journey.

    I figured this was going to be the most common response. My problem is patience, but I believe you are correct. 
    My worry is even after I have the down payment saved, I may still need the HELOC for repairs needed. But that probably carries less risk just because of dollar amount. 
    I have a decent amount saved so far. Might just need to wait a little longer. 🤷🏻‍♂️
    Thank you for your input. 
    0Reply
  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi Joseph,

    As others have mentioned, given the high interest rate on the HELOC, it would be a risky play to use the HELOC as a down payment as you'd need a way to pay this back. One way you could use the HELOC would be to put cosmetic rehabs on your primary, increase the value and do a cash-out refinance. This would make sense if there is room to add value.

    In general, the general move here would be do go for a house-hack with a low down payment or simply save up to invest in the next property.

    310-848-9776
    1Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Joseph Pilolli

    we're mixing a couple topics here.  i'll separate.

    1. you're not going to get much, if any, cash flow for the first few years on any long term rental.  period.  so the idea that your first rental will generate enough cash flow for you to buy another one?  it's not happening.  maybe in year 5 or 7 or 10 you'll start to see meaningful cash flow.  but do the math.  say you net $150 a month.  (which you won't.  you're going to have capex.  this is PA and OH!)  over 5 years, that's... $9K.  that's closing costs... not even a down payment.

    2. getting your capital back to pay off your HELOC - also tough. run the numbers on a BRRRR and you'll see.

    just trying to be realistic.  i have done a few BRRRRs and they're great investments.  i plan to keep them forever.  but they're not cash flow game changers.  your W2 income is going to subsidize your portfolio for the first few years.

    2Reply
  • Joseph Pilolli
    OP
    New to Real Estate · Youngstown, OH · Member since 2023 · 5 posts · 2 votes
    2y
    Quote from @Nicholas L.:

    @Joseph Pilolli

    we're mixing a couple topics here.  i'll separate.

    1. you're not going to get much, if any, cash flow for the first few years on any long term rental.  period.  so the idea that your first rental will generate enough cash flow for you to buy another one?  it's not happening.  maybe in year 5 or 7 or 10 you'll start to see meaningful cash flow.  but do the math.  say you net $150 a month.  (which you won't.  you're going to have capex.  this is PA and OH!)  over 5 years, that's... $9K.  that's closing costs... not even a down payment.

    2. getting your capital back to pay off your HELOC - also tough. run the numbers on a BRRRR and you'll see.

    just trying to be realistic.  i have done a few BRRRRs and they're great investments.  i plan to keep them forever.  but they're not cash flow game changers.  your W2 income is going to subsidize your portfolio for the first few years.

    That’s all great advice and I always welcome a good reality check. I think everyone here a has talked me out of using my HELOC toward a down payment. I might consider a smaller pull for updates if the updates could allow me to increase the value enough to refinance and get the HELOC paid off right away. For now, I will simply have to continue to save up for the initial down payment. 
    Cashflow for me was more meant for an aid in funding the next property, but understood my 9-5 would always have to be the primary contributor. I don’t plan on pulling funds from the property. More buy and hold until retirement where I will either sell or subsidize my retirement with the cashflow. 
    Quick side question. So far I am leaning toward multi family properties. I’m my area Four Plexes are quite common and utilized. Do you see slightly more or less cash flow on multi units or do you focus more on SFH in your portfolio?
    0Reply
  • Nicole Heasley Beitenman
    Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    2y
    Quote from @Joseph Pilolli:
    also, I am in Youngstown looking to have my properties be somewhere between Youngstown and Pittsburgh. 
    If you're in the Youngstown area, you should join our monthly meetup group! If you're interested, let me know and I can send you the details. 
    0Reply
  • Nicholas L.Pro Member
    Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
    2y

    @Joseph Pilolli

    slightly more cash flow in small multis although I prefer SFHs as the demand for them is very strong, i never have vacancy in the SFHs in my portfolio.

    0Reply
  • Jamie DietzBusiness Member
    Lender · Pittsburgh, PA · Member since 2015 · 176 posts · 90 votes
    2y

    Using a HELOC is often quick way to access capital but like everyone mentioned above it will be difficult to cash flow. Have you considered trying in a flip instead? If done correctly, your flip could raise cash to use as a down payment for a future rental.

    Next Door Capital515 Reviews
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