Repaying a HELOC

9 Replies

I am approaching my 1st rental property buy and of course trying to do all the homework. By the way BP.com is awesome. So rather than using my own cash or pulling money from stocks, I have been thinking about a HELOC. But when I do the math and add in the repayment of the HELOC as part of my monthly bill, my cash flow goes pretty low (around 140/month). The only way it seems worth it is to pay interest only on the HELOC, then my cash flow is around $261. But when the HELOC comes due, I would still be in the same situation. Granted, rent would go up over the course of 10 years but I imagine the interest on the HELOC would also.

So how can I repay a HELOC and not reduce my cash flow down to $140 bucks? Which seems not worth it.

@David W.

By doing the HELOC for the downpayment, you are essentially doing 100% financing. This decreases the cash flow but increases your rate of return (potentially to infinity). Here you need to balance the need for cash flow (in dollars) vs. the % return you are getting. The cash flow needs to cover an allowance for maintenance, vacancy, and capital expenses. Greater leveraging can get you into deals and generate a decent IRR, but you are at higher risk of something going wrong where you end up cash flowing negative or can't deal with a major expenditure. If you are capturing equity in this deal - like 15-20% of the market value or more - then you might still be OK.

However, I suspect in the DFW area, you can probably find something with higher cashflow for the size of the deal and the downpayment.  I would suggest you show your numbers to @Hattie Dizmond and get her advice.  She knows the DFW market well or can probably refer you to someone. 

HELOCs have a draw period and a repayment period. During the draw period, it is (or at least was) not unusual to have an interest only payment. That might be what you should look at. But you will probably be looking to do a cash out refi at some point; the proceeds from that can buy another property or pay down the HELOC.

You could use the HELOC to buy the property, then apply all of the rent against the HELOC every month. When you have an expense, you can draw on the HELOC again. This will help to minimize interest payments over time, if that is a goal.

I just purchased my last two rental homes using my HELOC. My strategy goes like this: I make cash offers (well below asking price) with a 2 week closing- and use my HELOC money to buy the house(s). I think I got lucky, but both deals had me walking into $30-50K equity. Once I owned the property- I would rehab to increase the value (around $7000 for each place). I then did a "cash out refinance" and was able to pay off the HELOC balance (including the rehab costs) due to the new appraised value of the home after my rehab. During the 60-90 days prior to the refi...I would only pay the interest on the HELOC. It also helped that I had renters in both houses as soon as they were updated. Now I enjoy a very low fixed rate (4.675%) for the life of the loan and I'm off to find another house! Good luck...I'm VERY new to REI, but feel free to reach out if you would like more details.

With the HELOC only allowed to be 80% of my home value I can't get to the point where I can get enough to pay for the rental entirely, my equity isn't low enough.

But after some reading, it doesn't seem like 140-150 cash flow is that bad, especially when I didn't put any I my own money down.

With the HELOC having a 10 yr draw and 15 yr term, if I paid on it based on 25 yrs that would help keep cash flow up, but I don't think I would want to keep it open that long. The other idea that was mentioned could be to find a property below value and then cash out refi to pay down the HELOC. I think it would be difficult to find a property 10k-15k below market value in Dallas, without requiring a lot of rehab. For my first rental I would like a turnkey home.

@Kerry Crandell I think what I have to have as a requirement is that when I buy the property I must gain equity immediately when it is bought. That way I can cash out refi and pay off the heloc and then use the heloc to buy another property when I am ready.

If I don't have a plan to pay off the heloc and I am stuck making payments on it, I wont have an out except to take my liquid cash and pay off the heloc, which I would rather not do. What do you think?

I bought 6 homes this year using a HELOC for the down payments and conventional financing. I am happy with the returns and plan to turn around and start paying off the HELOC when I get to 20 properties. By then the cash flow will pay it off in no time. But for now I'm ok with the interest only payments and any cash flow I get goes back into buying more properties. In the end I will have 20 properties without using any of my own money. All 100% financed (10 in my name and 10 in my wife's name). The long term benefits will make using the HELOC worth it.