HELOC on primary residence for investment of rental?

26 Replies

Hey everyone, 

2nd post here on BP and a newbie to RE investing. I've been soaking up info like a sponge through these forums, BP Podcast, and some audiobooks, as well as doing some research on Zillow, Trulia, etc. Here's my situation:

I'm looking through my options for capital on a single or multi-family rental property. I have some cash in savings, but I'd like to keep that on hand should any emergencies arise. Let's say my primary residence is valued at 650k and my mortgage is 350k. A quick HELOC calculator check from Chase.com tells me that at 80% LTV, I may qualify for up to 170k in credit. I most likely won't be taking that much, as I'd like to get my feet wet on my first investment with a down payment of 20k plus an extra 10-15k on rehab/reserves. My question is, if we were to move from our primary residence 1-2 years after the HELOC, how does the credit payback work, if at all? Can some of the profit from the sale be used to pay back the credit? Also, if anyone has had good/bad experiences with a HELOC please share.

I'm amazed at the wealth of information that can be found on these forums and the knowledge that all of you bring. I appreciate any and all of the feedback/advice that you give and I'm extremely grateful that I have found this community! Thanks again!

Hi.

Using a HELOC to fund investment properties is exactly what I am doing. I am a newbie too, though, so beware!
Here is my main tip: call tons of local banks and credit unions and talk to the person in charge of HELOCs. Ask this person all of the pertinent stuff regarding their HELOC product(s). Put this all on a spreadsheet. 
Here are the things you will want to know:
-The location(s) of the bank.
-The name of the person who specializes in HELOCs.
-What LTV they offer...most have 80%, some have 90%.
-Interest rate. It is usually related to prime (like, prime plus 1 or something). Make sure to ask if there is a floor. Some banks say their rate is prime, but they have a floor of 5.25%.
-Do they have any current promotions, like low intro rates or terms?
-What are their closing or appraisal costs or origination fees? Some banks have none!
-Annual fees? Check or atm fees?
-Is there a minimum initial dispursement or draw?
-Is there a minimum draw amount? Some banks require a few hundred dollars minimum to draw, which would not be a problem when buying a house, but could be if you are making supply purchases directly from the HELOC.
-Is there an early pay penalty?
-Do they require you to have another account with their bank in addition to the HELOC?
-After you draw against the HELOC, how much is due each month? Interest only? $100? There are various options.

I got all of this info from 18 or 19 institutions, and there was one that was clearly the best for me.

Another suggestion would be to get the longest term and the highest LTV possible. This will give you the most flexibility, assuming you can let it sit there with no balance on it for as long as you want.

Also, it seemed to me that some institutions were not keen on the idea of using a HELOC for investment purchases, so, just be aware of that. When applying, you usually have to state a reason you are getting it (like loan consolidation or home improvement or whatever). I suggest being honest though.

Also, depending on the institution, it may be easier to take the money from the HELOC and put into a separate REI checking account (maybe even at another bank). If you need to move money quickly for a closing, certified funds to yourself, and then from that checking account to the title company can be done in a matter of an hour or 2.

Regarding pay-off upon selling the house, I believe different banks will have different policies.

I hope that helps!

@Josh Durham thanks for the great info! I'll be putting together a nice checklist with these questions and compile all my findings into a spreadsheet. Good luck to you and keep me updated on your progress!

Thanks, guys.
One other note...I found that some bankers did not know what I was asking regarding some of those things. For example, more than once I asked "Do you have a required initial disbursement?" and they acted like they didn't understand the question. This probably just means they don't do that at all.

I closed on my first investment property several weeks ago, and paid cash with my HELOC. I am almost done rehabbing it. I plan to list it for rent by the end of next week. I'm just hoping and praying for a good appraisal (I should get what I need based on comps), and then I plan to refi into a commercial loan pulling out 75% of the appraised value. (You have to find a local lender that will allow a commercial refi with no seasoning time!) This amount should be more than enough to pay off the whole HELOC balance. Then I'm on to property #2! This is basically the BRRRR strategy that uses a HELOC as the funding source. Pretty sweet! This is the perfect method for me, a person who bought a fairly expensive SFH for my family before I had ever heard of house hacking or live-in flips.

Awesome info! Josh, regarding your commercial loan refi, did you have to have that set up prior to purchasing this property? Meaning how do you know you can find a local bank who will let you refi without seasoning? Because if you can't find one, then you will be stuck in the investment. Also, why commercial? Over 4 units? 

Thanks for the info, and congrats on your first investment! Still stuck on the "analysis paralysis " aspect on mine =(

@Juan Carlos Galang good points! I probably should have mentioned that.

Yes, I did find the lender ahead of time. I did not have it "set up" per se, but I did form a relationship with a lender and had a pretty strong indication that I would be able to refi after rehabbing my cash purchase.
I actually found 2 lenders, both small and local. One is a bank, the other a credit union. Both institutions allow a refi without seasoning, but ONLY if it is a commercial loan. For a residential loan, there is a 6 or 12 month seasoning. I want to use the BRRRR strategy at a pretty quick clip; I don't want to wait for seasoning...I want to pull my money out as soon as I have a tenant!

I decided to go with the bank because an investor friend of mine has refinanced a couple of dozen properties with them, and they are reportedly great to work for. So, I went and met with the commercial lender (who happens to be the bank president). But, before I asked for an in-person meeting, I sent her an email telling her my general strategy, work experience (I have some construction knowledge), and I sent her a copy of 2 years of tax returns, and a Statement of Financial Condition. My wife and I are both W2 employees with good incomes, and we have an okay net worth with limited debt, so, the lender saw I was a potentially good risk for lending. We met and hit it off. I've since been keeping her somewhat informed of how I'm progressing. She has 1 investment property of her own.

Anyway, my suggestion for finding a BRRRR lender is similar to my advice in finding a HELOC lender. Call a bunch of local institutions and ask what kind of lending options they have for refis soon after a cash purchase. A lot of these smaller, local institutions do their own underwriting and do not use Fannie Mae or Freddie Mac, and so they are more free to make their own decisions on individual borrowers. One downside of this specific type of REI is that lenders will often loan to you as an individual based on your own ability to repay; they'll likely lend based on your portfolio and business history once you have one.

Regarding the financial info that I gave her: I really didn't know much about these sort of things until I listened to some of Joshua Sheats's podcasts on radicalpersonalfinance.com. Podcast 22 tells you how to construct such a statement. RPF also has a podcast on creating a balance sheet and network statement. Good stuff. Good podcast.

Regarding your analysis paralysis, I suggest (assuming you have the cash on hand) making some offers. If it will help you take action, just make some low offers so that if they are accepted, it won't be too scary to pull the trigger. I made 2 or 3 low offers that were rejected before one was accepted. 
Good luck!

@Josh Durham yes I am. Study the last real estate correction (and pretty much every one in recent history) and you'll learn what happened to investors that got in late in the cycle and used short term, adjustable instruments like HELOC's. That strategy basically turns your assets into a house of cards WHEN the market corrects.

Keep studying financial history (S&L Crisis, LTM Failure, Dot com, great recession, etc) . It doesn't always repeat but it sure does rhyme. :)

@Ivan Barratt

Thanks for the clarification.
It does seem that we are likely on somewhat of a bubble right now. It's sure to correct at some point. Yours is a helpful caveat to keep in mind. I think using leverage on properties, and using a HELOC against your personal residence CAN be good and profitable. But, one must always be aware of possible downside, and must be aware of the conditions of the local market. For example, I am starting out by investing in a market and in neighborhoods that are not really inflated and are unlikely to lose much value. Also, I'm not going to use anymore than 15% of the current value of my home for investing. That is inline with my personal risk comfort level.
Good point, man. Thanks!

I did this several times during 2009 - 2013 to take advantage of  matket lows. I would not do it currently unless you could fall back on your 401K or other savings to keep your house if things went south in a big way. I used Pentagon Federal  Credit Union for my home equity loans and was very satisfied.

Good info. The market is definitely up from 2010, but I think it all goes back to the numbers. If the purchase price is right today and rents offset the loan, repairs, and tenant turnover, then you can probably withstand a market correction and the loan will be that much closer to being paid off.



Originally posted by @Justin Wotring :

Hey everyone, 

2nd post here on BP and a newbie to RE investing. I've been soaking up info like a sponge through these forums, BP Podcast, and some audiobooks, as well as doing some research on Zillow, Trulia, etc. Here's my situation:

I'm looking through my options for capital on a single or multi-family rental property. I have some cash in savings, but I'd like to keep that on hand should any emergencies arise. Let's say my primary residence is valued at 650k and my mortgage is 350k. A quick HELOC calculator check from Chase.com tells me that at 80% LTV, I may qualify for up to 170k in credit. I most likely won't be taking that much, as I'd like to get my feet wet on my first investment with a down payment of 20k plus an extra 10-15k on rehab/reserves. My question is, if we were to move from our primary residence 1-2 years after the HELOC, how does the credit payback work, if at all? Can some of the profit from the sale be used to pay back the credit? Also, if anyone has had good/bad experiences with a HELOC please share.

I'm amazed at the wealth of information that can be found on these forums and the knowledge that all of you bring. I appreciate any and all of the feedback/advice that you give and I'm extremely grateful that I have found this community! Thanks again!

The real question is how far are you prepared to go with the leverage? I don't not know your financial situation. Are you a duel income household? How steady is your household income? What does your DTI look like? Could you make it though a down turn?

If you take the HELOC and buy something outright, you could look at a cash out refi. Then take the rest of the money and buy more properties. Have you considered just taking a conventional investment loan as an alternative?

If you really want to get aggressive, you could take the HELOC money and use the money as down payments for multiple properties. You would most likely need to use commercial lenders, since DTI would quickly become a problem.

Originally posted by @Justin Wotring :

Hey everyone, 

2nd post here on BP and a newbie to RE investing. I've been soaking up info like a sponge through these forums, BP Podcast, and some audiobooks, as well as doing some research on Zillow, Trulia, etc. Here's my situation:

I'm looking through my options for capital on a single or multi-family rental property. I have some cash in savings, but I'd like to keep that on hand should any emergencies arise. Let's say my primary residence is valued at 650k and my mortgage is 350k. A quick HELOC calculator check from Chase.com tells me that at 80% LTV, I may qualify for up to 170k in credit. I most likely won't be taking that much, as I'd like to get my feet wet on my first investment with a down payment of 20k plus an extra 10-15k on rehab/reserves. My question is, if we were to move from our primary residence 1-2 years after the HELOC, how does the credit payback work, if at all? Can some of the profit from the sale be used to pay back the credit? Also, if anyone has had good/bad experiences with a HELOC please share.

I'm amazed at the wealth of information that can be found on these forums and the knowledge that all of you bring. I appreciate any and all of the feedback/advice that you give and I'm extremely grateful that I have found this community! Thanks again!

I took a HELOC from Chase as well. Very good experience. My advice is get approved for the max line you qualify for. You can decide to draw less but you have flexibility

Hi @Lesley Resnick , single income household with stable income. As a newbie, I'm still working on getting all my #s together (DTI, etc). A rough estimate of my DTI is around 25%. Talking about the HELOC with my wife, she didn't seem on-board with the idea. We may potentially have a decent sum of money coming our way early 2019, and that combined with the sale of our primary residence should be enough to allow us to get a nice primary residence, with a good amount left over to invest. If that's the case, we'll probably end up taking a conventional loan. I like the idea of being aggressive and purchasing multiple props if we went the HELOC route, but my #1 priority is keeping the wife happy. Thanks for the advice!

@Sunny D. glad to hear you had a good experience! I was speaking with a colleague at work the other day and he has a HELOC through a credit union that I also do business with. He shared the same advice about getting approved for the max, but taking only what I need. If I do look into this route, I'll be checking with them and comparing with a few other institutions. Thanks for sharing and the advice!

Originally posted by @Justin Wotring :

@Sunny D. glad to hear you had a good experience! I was speaking with a colleague at work the other day and he has a HELOC through a credit union that I also do business with. He shared the same advice about getting approved for the max, but taking only what I need. If I do look into this route, I'll be checking with them and comparing with a few other institutions. Thanks for sharing and the advice!

 also its easier to go through same bank that you used to get your primary loan. I paid 0 closing costs with chase and they actually did a full appraisal.

@Josh Durham we are considering a HELOC as first time investors. I am assuming you mean you used the HELOC for the entire purchase price - correct? We considered just using it for the down payment and a convention mortgage for the rest. Any thoughts on using a HELOC for full purchase price vs just the down payment?

Hi @Kelly Carter

Yes, I used my HELOC to pay for the investment property in full. I am also using the HELOC to rehab the property. Once it is rehabbed, I will rent it out, and then do a cash-out refinance. The goal will be to pull out the full amount invested so that I can pay off the HELOC. At that point, I'll have a mortgage on the rental house, but not have any additional loan against my personal residence. I like this for 2 reasons: First, my own home is not leveraged, and second, I have the full HELOC available to me to buy another rental house employing the same method.

A lot of the decision-making here comes down to your own comfort with risk and leverage.
Also, it kind of depends on your short- and long-term goals.

Would you use your HELOC to make a down payment on an investment, finance the remaining purchase price, and then rehab the property, and then refinance to get your HELOC investment back out and pay off the HELOC? If so, that's similar to what I am doing. The only downside here is that you will have to pay closing costs and other fees TWO TIMES. Once at the initial purchase and once when you refinance. This could be a couple thousand dollars or more. I don't like that extra cost. You might be better off with private money or hard money at that cost. 

Or, are you thinking you would use the HELOC as a down payment, finance the remainder of the purchase price with a traditional loan, and then just rent it out and pay on the loan? If so, then personally, I would NOT use  my HELOC for a down payment on an investment property in that scenario. Here is why:
1. I do not want to have that extra lien on my personal residence for an extended period of time. What it I want or need to sell my residence? That's a difficult circumstance.
2. I want to buy multiple investment properties, not just one. If I use my HELOC for a down payment, then I am out of money. Having just one investment property won't be very profitable, AND it is pretty high risk because of potential costs of vacancy, repairs, and capital expenses. Multiple properties with income can help weather some of those costs.
3. If your rental property is paid for with HELOC and mortgage, that means there is very little equity in the property and a lot of loan. That is just too much leverage for me. You'd likely be years away from paying off that property (and your HELOC) or buying another.
4. Being highly leveraged like that carries too much risk for me. Any downturn in the market and you are underwater on the investment property, and maybe even your personal residence. Maybe you can weather this with W2 income, or other business income, or rents...but maybe not.

In my mind, I will only use a HELOC if it allows me to pay for AND rehab a property AND have an after-repair value high enough to pull all my money back out with a cash-out refi. One difficulty in this method is making the numbers all work. You have to have a HELOC high enough to buy and rehab a property AND be able to find such a property in a neighborhood that will have a good enough appraisal after rehab and that will draw enough rent to cash flow.

A bit late to the game here but my two cents worth: I have a HELOC with my local credit union with a 4.25% interest rate and zero balance. I hold it as a last resort for very short-term loans to myself for purchases or reno costs. "Short-term" because the payment terms are $14/thousand borrowed which is roughly equivalent to a 15 year term. Adds up very quickly. Strongly suggest verifying payment terms when you are looking into the loan.

Originally posted by @Josh Durham :

Thanks, guys.
One other note...I found that some bankers did not know what I was asking regarding some of those things. For example, more than once I asked "Do you have a required initial disbursement?" and they acted like they didn't understand the question. This probably just means they don't do that at all.

I closed on my first investment property several weeks ago, and paid cash with my HELOC. I am almost done rehabbing it. I plan to list it for rent by the end of next week. I'm just hoping and praying for a good appraisal (I should get what I need based on comps), and then I plan to refi into a commercial loan pulling out 75% of the appraised value. (You have to find a local lender that will allow a commercial refi with no seasoning time!) This amount should be more than enough to pay off the whole HELOC balance. Then I'm on to property #2! This is basically the BRRRR strategy that uses a HELOC as the funding source. Pretty sweet! This is the perfect method for me, a person who bought a fairly expensive SFH for my family before I had ever heard of house hacking or live-in flips.

 Do you have any updates to provide?