IM NEW! | Can i/Should i use a HELOC to fund my first flip?

22 Replies

Our primary home is paid off after 2 years of pouring every penny we could into it. The market value is about $300k. We bought it as fixer upper for $188k, renovated and now plan to lease it out. 

We (my husband and i) are driving ourselves nuts trying to agree on the best way to fund our first flip. 

*The reason we have decided on a flip as our first investment, is because we need the quick cash to build up our reserves to eventually buy rental properties. Our end goal, to grow a profitable portfolio of rentals that will support our growing family. 

Since we burned through most of our cash paying off our current house, we are researching a HELOC or Home Equity Loan as a way to get started without waiting a few years to save our reserves back up.

Does anyone have advice on this? 

Smart or dumb? Why? 

What should we watch out for?

Is there a better option? 

Sincerely - "Motivated & Lost"

Its not smart to use a HELOC. You are introducing a huge amount of risk. You are assuming everything will work out great with the flip, but what if it doesn't? What if the rehab costs more than you planned? What if the Home doesn't sell for months and months?

Why do you NEED the quick cash? Sounds more like you just are itching to get started now. You poured every penny into paying your house off in2 years (congrats!), so why not just do the same for another year or two and save up enough to buy and rehab a flip? Or just buy your first rental? Once you buy the first and rent starts coming in, you save up to buy the second, then the 3rd, etc. Best to do it all with cash. It takes a little while to save up for the first and second, but after that you start to accumulate cash much faster.  Be a tortoise, not a hare.

@Katie Bader I think heloc is a great idea. 


@Dana Holland , how is the risk any different when using a heloc vs using their actual cash 2 years from now? If things go south and they loose money on the deal they'll just have some amount of a heloc payment rather than actually loosing the cash; appears to be no little difference in risk to me. Either way money is earned or lost. 

Another benefit of the heloc vs a traditional cash out refi is that the process is much quicker, fees are lower, and you can pay off and re borrow with the heloc as often as you want. 

If used responsibly, a HELOC is a great way to fund a deal due to the low interest rate and flexibility the loan provides. It is risky since you are betting your house on the deal in the event the deal goes very wrong. Just make sure your numbers are very very solid and make sure the numbers work in some "what if" scenarios as well.

@Katie Bader I am going threw the same thing. Except I still have 12 years on my rental property. It is worth significantly more then I bought it for. So I go back and forth between cash out refi and HELOC. leaning towards the HELOC because in 12 years that thing will be free and clear. You have equity in your home may as well use a little as long as your smart about it. Good Luck

Originally posted by @Katie Bader :

Does anyone have advice on this? 

Smart or dumb? Why? 

What should we watch out for?

Is there a better option? 

Sincerely - "Motivated & Lost"

 Yes. Smart as long as your investment is smart. Because you can borrow at under 5%. If you are going to do the deal anyway, why borrow at a higher rate?

You should look out for making a bad deal or not having enough funds available to get it done.

The only better option is to have cash and no debt or to be able to borrow money at an even cheaper interest, which is unlikely.

I use my HELOC all the time. It's making me money.

@Christian Wathne are you really suggesting that using a HELOC is the same risk as using cash?? The risk is that with a HELOC you are in debt to a bank and if for some reason (job loss, emergency situation, etc) you can't pay the bank, they come and take your home. People always say ‘oh that won't happen to me', but it happens every day. Debt is not a tool. I'm amazed at all the comments on this forum encouraging people to go many hundreds of thousands in debt. What happens if we have another housing crash?? I know it's not likely, but what if?? I don't want to owe $600,000 on real estate that is all of a sudden only worth $300,000

I’m so confused. Can anyone explain how in the world it makes sense to work really hard to pay a home off just to turn around and borrow against it again???  If you are going to do that, why didn’t you just save up the cash (instead of paying off the house) and use it to find a flip?

Originally posted by @Dana Holland :

@Christian Wathne are you really suggesting that using a HELOC is the same risk as using cash?? The risk is that with a HELOC you are in debt to a bank and if for some reason (job loss, emergency situation, etc) you can't pay the bank, they come and take your home. People always say ‘oh that won't happen to me', but it happens every day. Debt is not a tool. I'm amazed at all the comments on this forum encouraging people to go many hundreds of thousands in debt. What happens if we have another housing crash?? I know it's not likely, but what if?? I don't want to owe $600,000 on real estate that is all of a sudden only worth $300,000

 Dana, I'll take it a step further; using a heloc may well be LESS risk than investing with your own cash. It's classic rich dad / poor dad. Debt when used wisely is absolutely a tool . Nearly every large/successful business and real estate investor in the world utilizes debt to accelerate growth. 

@Dana Holland , while I (and most of BP) absolutely disagree with your premise that "Debt is not a tool", I did vote for your comment "why didn’t you just save up the cash (instead of paying off the house) and use it to find a flip?"

Did it surprise you that you would come to the conclusion that it could be GOOD to not pay off your own home? 

[Maybe there's hope for your risk-adverse approach after all]...

Originally posted by :
Originally posted Dana, I'll take it a step further; using a heloc may well be LESS risk than investing with your own cash. It's classic rich dad / poor dad. Debt when used wisely is absolutely a tool . Nearly every large/successful business and real estate investor in the world utilizes debt to accelerate growth. 

 Taking out a loan is LESS risk than using cash?!?!  That has zero logic.  

Your last line is also totally false. Many people build businesses slowly with cash, and many real estate investors (sensible ones) use cash.

@Katie Bader , if you're desperate to get into Flipping - you've already done one, right?

The only thing you haven't done is: sell it!

[Yes, I know, you don't want to sell your primary]. So, if your long term goal is rentals, what's stopping you from using your HELOC to buy rental/s now, rather than flips? The numbers need to be good either way, right? Welcome to BP...

@Brent Coombs

I didn’t conclude that it would be good to not pay off the house.  I just was saying what was the point of paying it off to simply borrow against it again.

You all can enjoy your multiple loans and mortgages. Hopefully they make you super rich. If the housing market crashes again I’ll be interested to know how that’s working out for you.

@Dana Holland

Leverage is a tool used by many businessmen and businesswomen here on BP and in the larger corporate world as well. Just because it is a tool you do not choose to use does not make it any less prudent or 'smart' as you stated earlier. There will always be risks with investments when using borrowed money or your own cash. Borrowed money allows you act today and take advantage of today's market. Nobody knows what will come two years from now, but there is a better chance at predicting what will happen 4 or 5 months from now. 

In that instance, using the borrowed money today can be more beneficial than waiting to use your own money down the road as down the road has even fewer guarantees than anything that'll happen in the immediate future. No strategy is fool or risk-proof and as others have stated, there are cases to be made about leveraging debt wisely to build a business.

Originally posted by @Dana Holland :
Originally posted by :
Originally posted Dana, I'll take it a step further; using a heloc may well be LESS risk than investing with your own cash. It's classic rich dad / poor dad. Debt when used wisely is absolutely a tool . Nearly every large/successful business and real estate investor in the world utilizes debt to accelerate growth. 

 Taking out a loan is LESS risk than using cash?!?!  That has zero logic.  

Your last line is also totally false. Many people build businesses slowly with cash, and many real estate investors (sensible ones) use cash.

The logic is: when the Bank lends you money, they are sharing in the risk! Also, your last line doesn't disprove Christian.

Originally posted by @Dana Holland :

@Brent Coombs

I didn’t conclude that it would be good to not pay off the house.  I just was saying what was the point of paying it off to simply borrow against it again.

You all can enjoy your multiple loans and mortgages. Hopefully they make you super rich. If the housing market crashes again I’ll be interested to know how that’s working out for you.

You're welcome to not aspire to "BIGGERpockets", by only spending your cash. I find it interesting that the likes of Dave Ramsey are against all debt except for one's own home, when that's the one debt that can't earn you an income! 

Meantime, your $600k paid-out home can also become worth $300k. (I'd be glad I put down <10%, and not paid it off).

It took me several years to get comfortable w/ using a HELOC to fund properties. Wanted to keep my personal house out of trouble. Now? It's been a great tool. I bought an auction house which I had to pay for in 24 hours. I then converted to a traditional loan. I bought a family trust sale house. Many other buyers but I paid "cash" which got me the house. I like leveraging my house to make money. The key is smart deals that can be converted to traditional loans.

Jim Watson

    This post has been removed.

    Originally posted by @Dana Holland :

    I’m so confused. Can anyone explain how in the world it makes sense to work really hard to pay a home off just to turn around and borrow against it again???  If you are going to do that, why didn’t you just save up the cash (instead of paying off the house) and use it to find a flip?

     Maybe it would have been smarter to buy an investment property instead of paying off a home.  If that mortgage is at 4%, then you are essential making (saving) 4% on your money by paying it off.  If that is your best opportunity at the time, either because there are no other opportunities or you are not aware of them, then that makes sense.  But if there is a "safe" opportunity to make 10% on that money, you'd be much better off investing in the opportunity than in your home.

    Don't make the mistake of thinking that anything is risk free. Even having cash is not risk free. What if there were sudden inflation that seriously devalued the buying power of that cash. Unlikely you say? I may agree but it IS a risk. We've had double digit inflation in the 70's and 80's. Everything carries risk. I use my HELOC all the time, but I am actually quite risk averse. I mitigate the risk by only buying great deals. I'm doing it right now. It would be foolish of me to pass up on making $20K so I can save $2K in interest.

    Originally posted by @Brent Coombs :

    You're welcome to not aspire to "BIGGERpockets", by only spending your cash. I find it interesting that the likes of Dave Ramsey are against all debt except for one's own home, when that's the one debt that can't earn you an income! 

    Meantime, your $600k paid-out home can also become worth $300k. (I'd be glad I put down <10%, and not paid it off).

    So what happens when you only put down <10% on a $600K house and it's now worth $300K?  You still owe $540K on a house that you can only sell for $300K if you needed to.  So you just foreclose on it? Declare bankruptcy?  Then how are you going to buy another property.  Oh right... with cash!

    I just don't understand how I see several people here saying things like "I use my HELOC all the time to make me money". If its making you so much money, why do you have to keep borrowing money? At some point you should have achieved those BIGGERpockets that will now enable you to use your own cash to invest.

    The housing market is doing well now.  The economy is doing well now.  So we are all doing well.  When the tide goes out, we will know who was skinny dipping.

    @Dana Holland You hold an extremely unpopular opinion among those at BP by eschewing debt.  Thankfully, "unpopular" doesn't mean "wrong."  Nor does "popular" equal "right."

    @Katie Bader Congratulations on meeting your goal of paying off your house. Sounds like your goals have changed, and now you would like access to that money again. Given what you've just achieved, and assuming you will again have the dedication to pay down the debt, I suggest the following: get the HELOC; fund the flip; continue to pay down your debt (now the HELOC) with whatever funds you were using to pay down your primary mortgage; set aside/invest the proceeds of the flip for your first rental house; take out the HELOC again; rinse and repeat.... Essentially, you are using debt to "pull forward future labor," which is a common use of it. You have the capability of saving for the rental house over the next, say, three years, but you also have the ability to access the funds needed, via debt, nearly immediately. Good luck!

    I love HELOCS. They are the gift that keeps on giving, without all the paperwork and pain. As long as you’re responsible with them (as with any loan, which you could also lose your prop with), they usually incur lower rates and you can use them over and over.

    Originally posted by @Dana Holland :
    Originally posted by @Brent Coombs:

    You're welcome to not aspire to "BIGGERpockets", by only spending your cash. I find it interesting that the likes of Dave Ramsey are against all debt except for one's own home, when that's the one debt that can't earn you an income! 

    Meantime, your $600k paid-out home can also become worth $300k. (I'd be glad I put down <10%, and not paid it off).

    So what happens when you only put down <10% on a $600K house and it's now worth $300K?  You still owe $540K on a house that you can only sell for $300K if you needed to.  So you just foreclose on it? Declare bankruptcy?  Then how are you going to buy another property.  Oh right... with cash!

    I just don't understand how I see several people here saying things like "I use my HELOC all the time to make me money". If its making you so much money, why do you have to keep borrowing money? At some point you should have achieved those BIGGERpockets that will now enable you to use your own cash to invest.

    The housing market is doing well now.  The economy is doing well now.  So we are all doing well.  When the tide goes out, we will know who was skinny dipping.

    When you asked "how are you going to buy another property?", your (sarcastic?) answer was "Oh right... with cash!"

    But in fact - you did answer your own question! If I saved up my cash instead of paying out my primary when I could have, I'd have sufficient to buy two more of those $300k properties (that used to be worth $600k, and would be again in future. But that won't really help you at that stage).

    Sure, I'd still owe $540k on my primary, but so what? Has everyone lost their job by then? If the Bank is so shortsighted that they call in the loan (and millions of others, all at once), I'd still have the option of paying it out - or, letting them foreclose on me. ie. Not the end of the world! How will you be placed to take advantage of the multitude of half-price opportunities that would await you?

    Oh wait, will you even be looking for opportunities? Is your ONLY plan: At least the Banks can't take my home?

    [Well, by then they won't care, because they'll already have your $600k+, for a home that's then only worth $300k!]

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