Using HELOC to invest in 1st rental property smart?

Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes

Hey Guys,

I have a single family home that I currently live in and I owe 104k on it. My real estate agent just sent me some comps on houses selling at 145k, 138k and 129k on my street. I will apply for the HELOC and hope to get enough for a down payment on a duplex rental property. Being that I am new to real estate investing, would this be a smart way to get the ball rolling in my investment venture?

Thanks in advance

-Brandon

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Mike Wood

Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes

10y

@Brandon Clark If you use conventional mortgage products, 5% down on investment properties is not possible. As stated before its 20% (SFR) to 25% (MFR) down payments (based on the appraised value). These are Fannie & Freddie Mac guidelines. You might be able to find private money with less down payment, but 5% is likely impossible to find.

The only way around that would be as @Matt Moldenhauer mentioned, buying houses as primary residences and living in them for at least one (1) year before moving out and turning them into a rental.

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Amanda CulletonPro Member
Rental Property Investor · Upstate NY · Member since 2016 · 21 posts · 5 votes
10y
I'm doing something similar for our first multi family. We have money for the down payment but took out a HELOC to pay for the renovations needed on the property.
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Mike Wood
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y
@Brandon Clark It is as long as you can afford it and you have sufficient equity in your primary house. A couple of things to consider, a) most HELOC's limit you to a max LTV of 90%, although you might find some banks that will push that higher, b) most HELOC appraisals will be low, as they are quick drive by appraisals and are more conservative than a full appraisal, and c) investment properties will required 20% down (SFR) or 25% down (2-4unit MFR).
If we average out the comps you indicated, and assume a max 90% LTV for your primary mortgage and HELOC, you looking at access to $19.3k. That would allow you to look at duplex houses up to $77.2k (not including prepaids). At that price, in Orleans parish, that's going to be a tough find.
Good luck with your investing.
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Matt Moldenhauer
Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes
10y
I could see it maybe being a decent idea because of the tax advantages. Wouldn't having a payment kill your cash flow though? It may not leave you with negative cash flow, but would surely put you in the red as soon as you started having to make repairs or it sat empty.
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Brandon Clark
OP
Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
10y
Those are great points! Looks like I need to go back to the drawing board. @Mike Wood @Matt Moldenhauer
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Brandon Clark
OP
Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
10y
Is it possible to get an conventional loan (5% down payment) on investment properties? @Mike Wood
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Rod HanksBusiness Member
Insurance Agent · Dallas, TX · Member since 2013 · 743 posts · 462 votes
10y
Brandon Clark That's a great creative idea! Just make sure you factor into your calculations the payment on the heloc. Make sure it cash flows and you have decent reserves. That's one of the easiest ways to buy with no money down.
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Andreas W.
Durham, NC · Member since 2013 · 502 posts · 215 votes
10y
@Brandon Clark
The 90% LTV is a max a lender will give you. The lender's underwriter might decide to give you less depending on your overall financial situation, which leaves a low Heloc amount, if at all any. Unfortunately, you might learn this at the end of the application process, after the application fee has been paid. That being said, find a lender who will waive the application fee and just give it a shot. Alternatively, you can buy a duplex with little money down and move into one side. This works as long as the mortgage is not considered for a rental property but for your primary residence. You can then rent out your previous primary residence.
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Matt Moldenhauer
Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes
10y
@Brandon Clark Is it possible to get an conventional loan (5% down payment) on investment properties?
From the discussions I've had with my lender, no. Even if you were able to do 5% down, you're cash flow wouldn't be there. You would probably need some "super secret" inside track where someone was willing to sell you a great piece of property that cash flowed for half price. Then maybe a lender would consider it. Maybe?
You might try refinancing your current home while it's still your primary for better cash flow. If it will appraise at a 80% LTV you could drop PMI, increasing your cash flow. Turn that house into a rental(if rents go that high in your area) and buy another primary at 3 or 5% down. Repeat. Your cash flow won't be the best, but your COCR will be great.
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Mike Wood
Developer · New Orleans, LA · Member since 2015 · 1k+ posts · 898 votes
10y
@Brandon Clark If you use conventional mortgage products, 5% down on investment properties is not possible. As stated before its 20% (SFR) to 25% (MFR) down payments (based on the appraised value). These are Fannie & Freddie Mac guidelines. You might be able to find private money with less down payment, but 5% is likely impossible to find.
The only way around that would be as @Matt Moldenhauer mentioned, buying houses as primary residences and living in them for at least one (1) year before moving out and turning them into a rental.
2 Reply
Jordas Reyes
Real Estate Agent · Naples, FL · Member since 2015 · 86 posts · 27 votes
10y
I just tried this approach on my house with balance of 180k and comps in the 220k+ range. The problem I ran into was the appraisal coming in low and with ltv rules it was a no go. The strategy is great in my opinion if you can get the loan and the new house had enough cash flow to cover the leveraged money.
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Brandon Clark
OP
Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
10y
@Jordas Reyes did you find an alternate route or are you still digging around?
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Jordas Reyes
Real Estate Agent · Naples, FL · Member since 2015 · 86 posts · 27 votes
10y
As of now no..I debated doing lending club but rather just save a few more pennies of my own money to put in. We are also doing a few updates to the house and will see how the market is doing in few months in my area. Updates are on the kitchen,floors, and bath.
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Mayank S.
Investor · Herndon, VA · Member since 2015 · 185 posts · 74 votes
10y
@Brandon Clark Best way is to house hack and live in one unit and your tenants in other unit. let your tenants pay the mortgage in the form of rent. Basically you are living for free as a landlord. You may qualify for FHA 3.5% down payment in that case if Heloc scenario doesn't work in your favor.
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Brandon Clark
OP
Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
10y
@Mayank S. Yea that seems to be my best bet. My primary is FHA so I would have to do conventional on the 2nd property. Looks like I should prep the primary for rental and live in one side of the new duplex and rent the other side out. I guess I should have cash flow from my primary. Mortgage is $840 and rentals in the area are from $1200-$1400 and the house is in pretty good shape (updated in 2008).
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Matt Moldenhauer
Investor · Springfield, MO · Member since 2016 · 88 posts · 29 votes
10y
@Brandon Clark if the comps on your street are going for what you say they are, you should be able to refinance your house with a conventional loan. Appraisal comes in at $130,000 and you owe $104,000, there's your 80% LTV and you can drop PMI. You might need to add some money to cover your closing costs. UNLESS your home appraises for $135,000 and then that would leave you with an extra $4,000 to help cover your closing and prepaids. I'm currently in the middle of doing this so that's why i'm familiar with it. This would allow you to get another FHA loan.
Don't forget about your six months reserves though. You need to have six months of cash on hand to cover your mortgage for your investment property. Money in a retirement account can be considered too:)
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Phil Moeller
Rental Property Investor · Maria Stein, OH · Member since 2015 · 7 posts · 7 votes
10y
I use my HELOC to buy houses using the brrrr strategy. I buy the house, fix it up, then refi it so I can free up my HELOC money and do the next.
Using your HELOC as your down payment is going to put you in a highly leveraged position with 2 payments. Also, the HELOC terms are tyoically pretty short to pay off, so the payments will be higher than conventional, so make sure you discuss the payment amount with the bank and ensure you can still cash flow. Finally, HELOC rates are typically adjustable so if rates would increase dramatically it could get you in trouble......just something else to be aware of.
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Esequiel J.
Real Estate Investor · Phoenix, AZ · Member since 2010 · 1 post · 1 vote
10y
@Brandon Clark, Another option to consider might be to liquidate your primary home and capitalize on the tax free equity and thereby opening up the door to a new primary residence with say a 3.5 FHA loan on that Duplex, Tripex, or four Plex. Now you own a multi unit with only 3.5 percent, you have tax free capital on hand from the sale of your primary, and you are cash flowing because you're tenant pays your mortgage for you. You are in control. No HELOCS. Next enjoy your property , stabilize it, get familiar with your business, and deposit your savings because you don't pay a mortgage anymore, and look for your next deal accordingly as you see fit. As for your primary, don't feel bad about selling it as it actually helped you go from a liability to a positive cash flow play. Anyways , these are just humble two cents and wish you the best of success.
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Brandon Clark
OP
Real Estate Investor · New Orleans, LA · Member since 2016 · 95 posts · 5 votes
10y
Thanks everyone! I meet with my lender Friday so hopefully I can get the home appraised to see what's my next move.
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