Tell me about your BRRR deal using a HELOC!

Nolan M.

Rental Property Investor · Mesa, AZ · Member since 2015 · 143 posts · 187 votes

Great post, I just got a 100k heloc on my primary residence through navy federal. They offer up to 95% ltv. They did an desktop appraisal and it came in 100k less than I needed it to. I paid the $500 for a real appraisal and it came back where I needed it to, go figure. If you can get away with a lower desktop appraisal then you won’t need to finish your projects, otherwise plan on paying the $500 and having your house looking it’s best. I haven’t done anything with the $ yet but I have one deal in the works, good luck!

2 Reply

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

Thank you both for your thoughts! Very helpful. Looking forward to others sharing their experiences as well here.

Alex Corral

Denver, CO · Member since 2017 · 142 posts · 104 votes

I just closed yesterday on my HELOC with Third Federal. They have a max limit of $150k & it was super easy. Drive by appraisal which was $30k under, but I still got the max $150k. They have a 2% floor rate (best I've seen), and offer a .-74 under Prime. I probably shopped 20 banks. Using the money to buy cash, BRRR and then cash out refi. Although I also debate on the refi because mortgage rate would be about 5.5%, but then I'd be out of cash.

John Leavelle

Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes

Howdy @Nicole A.

1. Like you I had a few interior and exterior projects going when I contemplated getting the HELOC. I was advised by my lender to complete the projects to maximize my available funds (I.e. appraised value). So that's what I did.

2. The 6 - 12 month seasoning is typically related to conventional Fannie/Freddie loan requirements. There are other Refinance options that can be used. Delayed financing, Rate/Term loans, portfolio or commercial loan products. All have varying advantages and disadvantages.

3. I currently get tenants in before the appraisal do to the seasoning requirements. Hope to change this soon.

4. My appraisal is after Rehab for now.

5. I use a private lender to purchase properties. They also pay the acquisition closing costs. I use my HELOC to pay for the Rehab, Holding costs, and any Refinance closing costs.

6. Not an issue for me yet.

7. I would only use HELOC funds for a Down payment if it was a deal to good to pass up. And If my private lender funds were not available.

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

Once your property is complete and it is appraised, you can do a cash-out refinance...and assuming this is a LLC-owned property, one can expect the bank/lender to do a max of 70% of its appraisal, correct? If I am correct, run me through this thinking:

2-unit property in 21222 (Both apartments are a 1 bed/1bath).

Asking $59,900

The property is in bad shape. It essentially needs a full rehab.

I've never had to a rehab to the extent that this property needs, so right off the bat, I'm guessing it'll need at least $35K in rehab going off numbers I've seen from past repairs, lighter rehabs, etc.

ARV is tough to me... if these 2 units were 2 bedrooms each, it'd easily be $100K. So I went with an ARV of $80K.

70% of $80,000= $56,000

$56,000 - $35,000 in repairs = $21,000

This doesn't even factor in closing and holding costs.

If a bank will only cash-out 70% of the ARV/appraisal, that would be back to the $56,000, which means that if I put any more than $56,000 total into the deal, then there would be money out of my pocket in the end.

It seems with a BRRR, you kinda need to work backwards a bit, correct? Determine the cash-out I can get after the rehab, and know that I can not put in more than that number into the deal if I do not want to pay out of pocket.

Am I thinking along the correct lines?

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

I feel like a newbie all over again asking some of these questions, but oh well:

I'm going to guess that you can't go to closing with your HELOC checkbook, but would instead need a certified check. Do you guys write the HELOC check to yourselves and then get the certified check to bring to closing?

Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

"It seems with a BRRR, you kinda need to work backwards a bit, correct? Determine the cash-out I can get after the rehab, and know that I can not put in more than that number into the deal if I do not want to pay out of pocket".

Correct!

Ashley Cao

Lender · Santa Clara, CA · Member since 2018 · 46 posts · 74 votes

Originally posted by @Nicole A.:

I feel like a newbie all over again asking some of these questions, but oh well:

I'm going to guess that you can't go to closing with your HELOC checkbook, but would instead need a certified check. Do you guys write the HELOC check to yourselves and then get the certified check to bring to closing?

First, thanks for sharing this post. You asked all the questions in a much more eloquent way than it sounded in my head!

Regarding closing, how did you bring the funds?

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

Hey Ashley! My guess over a year ago was correct. I wrote the HELOC check to myself (really my LLC since it was purchasing), and then turned around and got a certified check to bring to closing. Just remember it might take a couple of days for the check to clear into your account so don't do that last minute.

Gilbert Chan

Investor · Member since 2019 · 9 posts · 3 votes

@Nicole A. did you end up brrrrr-ing the house you mentioned? What was your outcome?

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

@Gilbert Chan I did end up doing a BRRR deal but not on the property I mentioned. That property just needed too much work and I didn't think it'd appraise for what I needed. I ended up BRRRing a rowhome that was a HUD home for sale and it overall went well. However, I did underestimate slightly and after the refinance, I ended up paying $5K out of pocket to get into that property because essentially I was $5K short to pay back my HELOC after the cash-out refinance. To not beat myself up too much, I remind myself that getting a cash-flowing property for $5K isn't too bad.

Barbara E.

Investor · Raleigh, NC · Member since 2014 · 9 posts · 7 votes

Late to the party, but I don't feel guilty because this thread began years ago and has been added to up until 8 months ago! ;-) @Nicole A.- how did you talk to the bank about getting a HELOC for property investment. I know that they are more relaxed than with mortgages, but should I apply for the HELOC when I'm ready to pounce on a property, or well beforehand? How does the bank generally feel about using the line for a brrrr? Do you recommend a specific way of approaching this with them? I won't 'pounce' on a property until after C-19 reveals what it will do to the market, but I want to be good and ready so I don't miss any opportunities. Thanks!!

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

@Barbara E. My HELOC was on my primary home. From what I understand it's easier to get a HELOC on your primary house (provided you have plenty of equity), and for investment properties with equity, people get a "LOC". I believe when they asked what I would use the HELOC for (it wasn't a big interrogation, more like a passing question) I just told them it was for house projects/renovations. Explaining my plans to do a BRRR was probably not going to help me at all and possibly just raise red flags for them. Just saying it's for house renovations isn't fully out of line. :-) Never offer more information than asked...the average banker will not be impressed with your grand goals. They'll just see risk.

Barbara E.

Investor · Raleigh, NC · Member since 2014 · 9 posts · 7 votes

Thank you @Nicole A.! The home in question for my HELOC is my primary residence, which I own outright. I wasn't sure if they would want to dive into what I'd be doing with the moola, as I've never attempted to secure one. I don't have a typical day job, so I'm hoping I can still secure a line. Anyhow, you've answered my question perfectly- thank you so much and happy investing!

Anthony McKeen

Member since 2020 · 10 posts · 7 votes

Hi all! I know I'm even more late to this HELOC discussion but I think it's a beneficial one. My primary residence is completely paid off and I am currently in the process of getting a HELOC to purchase a duplex. Looking in the purchase price range of 120-150K. I am trying to decide if I should use the HELOC to pay the entire purchase price of the duplex in cash up front, or just use the HELOC for a 20% down payment and obtain a mortgage for the remainder. My goal is to have a cash flowing rental unit moving forward. Any thoughts/experiences would be greatly appreciated!! Thanks in advance!!

Gail Ryder

Member since 2019 · 1 post · 0 votes

Anthony put it this way - why use your own money when you can use OPM (other people's money). I would use your HELOC for the down payment and closing costs for your new duplex then get a mortgage for the rest. You can write off your mortgage interest anyway, and if it's a duplex it will be cash flowing, which should pay for your mortgage. Then use the rest of your HELOC money to buy another one, and another one. You could buy one house with your entire HELOC or you could buy several, as long as you can get mortgages on the properties. If an A lender bank doesn't give you a mortgage go to a B,C, or D lender (private money). You'll pay a higher interest rate but as long as the numbers work and the property is still cash flowing who cares? Plus you can write off all the interest anyway. This is how investors do it to scale up.

Nicole A.Pro Member

OP

Rental Property Investor · Baltimore County Maryland and Tampa Florida · Member since 2013 · 2k+ posts · 2k+ votes

@Anthony McKeen and @Gail Ryder, lots of people do talk about using a HELOC to pay for the downpayment of properties. But you need to know for sure that the cash flow will be there. The monthly payment due each month on your HELOC is *interest only*. So if you ever want to actually pay off that HELOC, you need to be able to pay more than the monthly amount. Ideally, you will have a timeline to pay it off...say 6 months...so you know roughly how much extra each month you need to be able to afford to pay to get that HELOC balance back to zero.

Also, as you've probably discovered by now, Anthony, the bank will only give you around 75-80% of the value of your home (minus any existing leins on the home like a first mortgage) for your HELOC. It will not be the full value of your home.

I recommend using a HELOC for BRRRs whenever possible. I know it can be hard in some markets. And BRRR requires you to work the numbers backwards. For example, if you find a property that will have an ARV of $200,000, you need to remember than when you do the cash-out refinance, they'll only give you 70-80% of the appraised value.

So that means right off the bat that you can't be more than $140,000 (if refi is only for 70% value) *all in*. That means, purhcase price plus closing costs. That means fix up costs. That means holding costs (such as that monthly HELOC payment and utilities and inspections, fees, etc). That also means the closing costs of the cash-out refinance at the end (this is how I ended up $5K short, but I like to think paying $5 for a rental is pretty good, but just doesn't give me the full power of BRRR).

Anthony Vann

Investor · Hampton, VA · Member since 2017 · 49 posts · 86 votes

If you use the HELOC for a downpayment than the debt service on that HELOC is going to have to be included in your numbers every month. Make sure you don't forget about that. Also, most HELOCs that I've seen are for ten years or so. That means you have to include principle and interest in your payments. That might cut into your cash flow substantially.

Personally, I've used my HELOC for single family. I use the HELOC to purchase value add properties in cash and then use a cash out refinance to pull the money back out. If you work the numbers right the the 65-70% (LTV numbers have fallen since Covid but they're creeping back up) you get back should repay what you spent on the purchase and renovation. Doing it this way means your cashflow numbers stay pretty strong.

Also, many banks want to know where the down payment money came from so they ask for 60 days of bank statements. They want to see that it is yours and that it has been in your account. If they find out it's from a HELOC they won't be happy. From their perspective it means you're not willing to put any skin in the game and the risk is all on them. I would check with the bank to see if they would even allow this.

Gordon Ray

New to Real Estate · Central Texas · Member since 2020 · 29 posts · 13 votes