Using HELOC as a down payment

8 Replies

Hello everyone, 

I'm considering using a heloc for a downpayment on my first property, however every time I run the numbers through the rental property calculator, the monthly cash flow in usually under $100. I understand the reason behind this is I have a larger P/I payment which eats into the cash flow. My ROI usually is good due to me only paying closing costs and repairs.

In this situation, is accepting a lower cash flow acceptable if I'm doing it low money down? I know Brandon Turner states $150 to 200 is good monthly cash flow but I believe he factors in a 20% DP when I see him use the calculator. 

If I used a heloc, I would refinance into a 30 year loan before the APR rate increases.

Thank you for your time, 

Chris 

If you have enough equity to purchase a property using that line, I'd recommend going that route. You can refinance and pay off your heloc and repeat.

That said, I wouldn't commit to any arbitrary rules of thumb for cashflow or any other buying criteria. Decide what works for YOU, and don't waiver.

@Christopher Ward - I have built a sizable portfolio and have contributed no additional cash outside of financing the down payment and renovation costs on the first property.

If you can pull money out of your foster investment property to by another and still cover your costs, in my mind it's a no brainer.

You are essentially acquiring assets with now cash out of pocket!

You could leverage your HELOC to accelerate payment on your house, then tap into the equity to purchase more investment properties. This is an example of what to do.

Take out a simple interest home equity line at 4.4% (keep in mind that HELOCs usually have a variable rate)

Lets say that's $40,000 and you pay $20,000 of that toward your mortgage. (Accelerating payoff of amortized debt)

Now setup and use your HELOC as your bank account and deposit all of your income into your HELOC. Since you are paying simple daily interest, deposit your income at the beginning of the month, and pay your expenses at the end of the month therefore keeping the balance as low as possible. If you can have a lower balance for a majority of the month, you'll save a great deal on interest.

Allow any surplus to remain in the account to pay down your HELOC balance back to zero. This won't work if you're living paycheck to paycheck. You need some surplus at the end of every month to pay down the principle.

When you reach a zero balance, pay another 20k from your line to the mortgage. Repeat this chunking process until your mortgage is paid off.

When applying this strategy, most people can pay off their 30 year mortgage in 6 - 10 years, even faster in some cases just depending on how long you've had the mortgage when you start.

I work with some banks that do 30 year fixed, first position Lines - allowing you to pay off the mortgage and with the line and have the line in first position.

There is obviously more piece to this so this is the strategy in a nutshell. Feel free to reach out if you'd like more info to learn how to do this.

Originally posted by @Andrew Hartzel :

You could leverage your HELOC to accelerate payment on your house, then tap into the equity to purchase more investment properties. This is an example of what to do.

Take out a simple interest home equity line at 4.4% (keep in mind that HELOCs usually have a variable rate)

Lets say that's $40,000 and you pay $20,000 of that toward your mortgage. (Accelerating payoff of amortized debt)

Now setup and use your HELOC as your bank account and deposit all of your income into your HELOC. Since you are paying simple daily interest, deposit your income at the beginning of the month, and pay your expenses at the end of the month therefore keeping the balance as low as possible. If you can have a lower balance for a majority of the month, you'll save a great deal on interest.

Allow any surplus to remain in the account to pay down your HELOC balance back to zero. This won't work if you're living paycheck to paycheck. You need some surplus at the end of every month to pay down the principle.

When you reach a zero balance, pay another 20k from your line to the mortgage. Repeat this chunking process until your mortgage is paid off.

When applying this strategy, most people can pay off their 30 year mortgage in 6 - 10 years, even faster in some cases just depending on how long you've had the mortgage when you start.

I work with some banks that do 30 year fixed, first position Lines - allowing you to pay off the mortgage and with the line and have the line in first position.

There is obviously more piece to this so this is the strategy in a nutshell. Feel free to reach out if you'd like more info to learn how to do this.

 Thank you guys so far for the replies. Andrew, are you talking about paying off the rental property with that method? If so, I thought aquiring new rental properties was a better use of funds rather than paying off current properties. I could be misinterpreting what you wrote. 

I have a new question. If I can aquire a property 100% using HELOC only, should I? Or is the smarter option to use HELOC for the DP and obtain a loan for the remaining amount to purchase the property?

Use as little of a he heloc as possible and get the rest with a traditional mortgage. That way you can use any remaining heloc balance on prop #3.

can't you just use the HELOC then do delayed financing and get most it back out? Assuming you're at high enough $ for a loan.

@Christopher Blanco @Matt K. this is something I found from another BP member (Andrew Postel) I am going to start implementing #2 and once I gain some experience will look more into #3. Here goes:

1. The Conventional Rules For a Cash Out Loan

Fannie Mae and Freddie Mac are the Government Agencies that sponsor conventional lending. Most banks will have these loans as an option. There are other loan types as well but for brevity we will limit this post to the “Conventional” lending (Fannie/Freddie).

  • Conventional Loans limit your cash out on an investment property to 75% of the “After Repair Value” on a Single-Family home (70% on a 2-4 unit home). This is also the same percentage that you need for a non-cash out refinance (more on why that is important later).
  • If you purchased the investment property with a loan, then conventional loans will require you to wait 6 month to take cash out.
  • This rule does not apply if you purchased the home with CASH (more on that in section 2).

Let’s explore some examples here:

If you purchased a property with a 15% down conventional loan (85% loan to value) and you wanted to get cash out, you wouldn’t be able to do so since the cash out limit is 75% of the “Loan to Value”. The MAXIMUM cash out you can receive is 75% of the value of the property.

If you purchased a property with a loan, but did the rehab on with your own cash, then you would need to wait 6 months to get that cash back. Keep in mind you could only receive 75% back of the After Repair Value.

So if you bought a home with a loan of $50k, it required $30k in renovations, and it appraised for $100k after the repair work was complete then….

You would refinance the $50k loan, receive back $25k in cash…since $75k would be 75% of the After Repair Value.

2. Buying a home with Cash

Buying a home with cash has become increasingly popular for many investors but often an investor will be caught with the restrictions to cash out loans if they need to get their money back. There is a plan to avoid this entire section (In section 3) but it is important for us to know about these restrictions. If an investor is buying with cash and flipping they get their money back when they sell the property. But if they are seeking to hold a property for any length of time and want their cash investment back there are some important rules to understand with conventional loan:

If you buy a property with cash (or with a HELOC) you can receive a cash out loan on Day 1.

There is not a 6 month waiting period with receiving a cash out loan if you purchased a home with cash or with a HELOC

BUT you will be limited to the amount of….

Your purchase price + closing costs (costs when you purchased the home)

OR

75% of the “After Repair Value”…

WHICHEVER IS THE LOWER AMOUNT (super important)

These rules are important to understand so here are two examples:

Example 1: If you purchased a home with $50k of cash, and put $30k of renovations into the loan, and the home was worth $100k. 75% is $75k and $50k is your purchase price. So you could only receive $50k in your first 6 months ofownership since the LOWER amount is your purchase price. After 6 months you could receive the full 75% of the ARV.

Example 2: If you purchased a home with $80k of cash, put $5k into the home, and the home was worth $100k. 75% would be $75k and your purchase price is $80k…so the lower amount is $75k.

When buying a home with cash you can absolutely get cash back right away but you will be limited to the lower of those two amounts.

3. HOW TO PROPERLY STRUCTURE BUYING A HOME WITH CASH

With these rules, you can see how it can be confusing to get conventional lending when buying a home with cash but there is absolutely a proper method to structuring your deals when buying cash. Here’s the secret:

Create an LLC and have the LLC lend you a mortgage on the property you are receiving.

The reason why this works is because instead of you needing cash or receiving a cash out loan, we are now refinancing a loan – your loan. There no reason to wait any time or have any “whichever is lower” rule come into play. We are just refinancing a loan.

Here’s how it works:

You create an LLC

You buy a home

Your LLC gives you a loan for the home

You file the deed for that loan at the county courthouse

You use the money from the LLC to buy and fix up the property

Once the property is completed, your conventional lender comes to refinance the loan

Your conventional lender runs title and sees there is a loan.

Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value.

Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.

Some things to think of:

To file a deed at the county courthouse is $100-$150 in cost (depending on which county)

And you want that note to be pretty close to 70% of the ARV for the property if you don't want to bring any money to closing. 70% will allow you to roll in your closing costs. If you want it to be at 75% just keep in mind you would need to bring your closing costs out of your pocket to complete the refinance.

Originally posted by @Christopher Ward :
Originally posted by @Andrew Hartzel:

You could leverage your HELOC to accelerate payment on your house, then tap into the equity to purchase more investment properties. This is an example of what to do.

Take out a simple interest home equity line at 4.4% (keep in mind that HELOCs usually have a variable rate)

Lets say that's $40,000 and you pay $20,000 of that toward your mortgage. (Accelerating payoff of amortized debt)

Now setup and use your HELOC as your bank account and deposit all of your income into your HELOC. Since you are paying simple daily interest, deposit your income at the beginning of the month, and pay your expenses at the end of the month therefore keeping the balance as low as possible. If you can have a lower balance for a majority of the month, you'll save a great deal on interest.

Allow any surplus to remain in the account to pay down your HELOC balance back to zero. This won't work if you're living paycheck to paycheck. You need some surplus at the end of every month to pay down the principle.

When you reach a zero balance, pay another 20k from your line to the mortgage. Repeat this chunking process until your mortgage is paid off.

When applying this strategy, most people can pay off their 30 year mortgage in 6 - 10 years, even faster in some cases just depending on how long you've had the mortgage when you start.

I work with some banks that do 30 year fixed, first position Lines - allowing you to pay off the mortgage and with the line and have the line in first position.

There is obviously more piece to this so this is the strategy in a nutshell. Feel free to reach out if you'd like more info to learn how to do this.

 Thank you guys so far for the replies. Andrew, are you talking about paying off the rental property with that method? If so, I thought aquiring new rental properties was a better use of funds rather than paying off current properties. I could be misinterpreting what you wrote. 

I have a new question. If I can aquire a property 100% using HELOC only, should I? Or is the smarter option to use HELOC for the DP and obtain a loan for the remaining amount to purchase the property?

The method I explained is about paying off a mortgage so that you have more equity to access a bigger HELOC. Of course you can just take what you have and put it on another property, the choice is up to you. What I'm proposing is an accelerated strategy where you pay off one property then go get X more. Then repeat the payoff process and now you have more free and clear properties to get a HELOC on then go out and get XX more properties, essentially a snowball effect to the point you have as many free and clear properties as you wish. We have investors using this strategy, one of which has 60+ properties now in just 9 years, and he never has to get a mortgage or worry about the property value going upside down. Its definitely an advanced strategy that take some time to fully understand but once you do you won't want to go any other way...in my opinion at least.

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