HELOC Investment Strategies

Buying & Selling Real Estate
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HELOC Investment Strategies

Tim Kaminski
St. Petersburg, FL · Member since 2015 · 317 posts · 71 votes

BP,

Have acquired my first property February of 2018.  Recently got a soft appraisal from my realtor and banker who told me they feel comfortable that I can get $50K out of the home to use on a new property.  I'm in Tampa, FL and mainly looking for 2-4 units so $50K doesn't get me anywhere close to my market prices($150-250K).  I know ppl invest with HELOCs and just wanted to understand how, exactly.  I put about 20K of my personal money into the purchase and rehab of property and was hoping to be able to pull out and recycle the money.

Options as I see them.

  • Use $50K as a downpayment on property in my area.  That would mean I have loans on 100% of the property.  That sounds risky.  Do ppl do this?  
  • Use $50K as "cash" purchase of OOS investment properties in cheaper market.  Refinance property to pull money back out.  Repeat  Again, risky with unknown market.
  • Wait for $50K to grow to 100-150K.   Buy all cash and refinance. Risky as market looks like it may go down/level.  Can take years and years to reach this. 

LOTS OF RISK. I want to grow and use the money I have created.  Any ideas?

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y

Yes, most leverage 80% to scale.  I put a Heloc on my house this year. Haven't used it, but it wasnt difficult to qualify for and only $375 to establish + I think an annual maintenance fee. Not much harm to have just in case.

Glad you are aware of the risk of borrowing more, but it depends on the deal.  I bought a BRR this year and the returns were more than enough to borrow for.  I would rather borrow for a good deal in my local market than buy a hood house OOS at retail with the money I have.  

20% down on a good deal is much better than 100% down on a bad one.

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    Yes, most leverage 80% to scale.  I put a Heloc on my house this year. Haven't used it, but it wasnt difficult to qualify for and only $375 to establish + I think an annual maintenance fee. Not much harm to have just in case.

    Glad you are aware of the risk of borrowing more, but it depends on the deal.  I bought a BRR this year and the returns were more than enough to borrow for.  I would rather borrow for a good deal in my local market than buy a hood house OOS at retail with the money I have.  

    20% down on a good deal is much better than 100% down on a bad one.

    2Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @tim 

    @Tim Kaminski you are on the right track. If you can get enough equity out, the best way to use a HELOC is to buy something outright in "cash" and then refinance the subject property at a higher value. This allows you to pay back the HELOC and then... rinse and repeat!

    I have never had enough equity to pull this off as the values are a lot higher hear (60-80k per unit for multis), bu I have used the HELOC as a part of a down payment. Obviously, you then have to pay the HELOC every month until you can pay it back. I used the cash flow from the new property to pay down the HELOC.

    2Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Tim,

    That seems very risky to me. I am not a fan of pulling a HELOC out and then using it to buy another property while getting a loan on that 2nd house. Now pulling the HELOC out and buying the 2nd house cash like John mentioned is a good idea and proper way to leverage in my opinion.

    Its all about risk management.  I don't want to be over-leveraged just in case something happens and I have to start over.  I am also a conservative investor and my main goal is not to own 40 doors making $200 a pop.   I rather have 12 houses paid off and golf 3x a week with no worries and low risk.  

    Now, how do you get to own the 2nd property without being over-leveraged? Do the same thing that got you to the first house. Now it should be easier because you can pull the HELOC out and use the rest with cash you saved up. Yes, this will take longer but lowers your risk.

    1Reply
  • Tim Kaminski
    OP
    St. Petersburg, FL · Member since 2015 · 317 posts · 71 votes
    7y

    @Steve Vaughan So you support using HELOC for downpayment and finance the rest?

    @John Warren You've used HELOC as majority of downpayment? How bad did that cut into your cashflow? How long did it take you to pay down fully?

    @Frank Wong So you would support using HELOC to fully purchase property and then refinance out once rehabbed? How do you fully pay off homes? With just cashflow going to pay down principle?

    If I can't pay off house fully with HELOC, you are saying to just use my personal money again to purchase another home? or mix personal with HELOC for downpayment? BC that would be almost 100% financed like you said not to do. Just trying to understand what you are saying

    0Reply
  • Tim Kaminski
    OP
    St. Petersburg, FL · Member since 2015 · 317 posts · 71 votes
    7y

    I'm trying to figure out how to use this money that I created through rehabbing to continue to grow my portfolio.  Would rather not continue to use personal funds if possible.  Do I need to wait for house to appreciate into the $100K mark and then refinance?

    0Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    Hi Tim,

    For example. You have a HELOC you can pull out for $50k for your next purchase. You find a property you want to buy for $100k. I would use the $50k HELOC and $50k of my personal savings to make the purchase cash. Of course, if you don't have $50k saved this won't work and I won't do it.

    Now, this is not set in stone. So, for example, I find a ridiculous and killer deal. I will use the $50k HELOC as my down payment and get a loan for the purchase. What makes a deal so good that I want to do this. Example. I find a property that I can purchase for $100k sink $30k into and the ARV will be $210k. That's a no-brainer for me.

    1Reply
  • Tim Kaminski
    OP
    St. Petersburg, FL · Member since 2015 · 317 posts · 71 votes
    7y

    @Frank WongI see what you are saying. Unfortunately my personal funds are not at that level yet and properties in my market tend to be high, though not as high as yours I'm sure. So unless I find a great deal, HELOC may not be the best option at this time. Thanks for your responses

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y
    Originally posted by @Tim Kaminski:

    @Steve Vaughan So you support using HELOC for downpayment and finance the rest?

    Only on an exceptional purchase like I said, then Frank said.

    I haven't needed to yet (did my last couple with cash, too many repairs) but would finance with heloc as DP if like Frank outlined. If you're just buying turnkey or off the MLS close to retail? No way.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Tim Kaminski based on what you said, you understand how it works. The question is if you take $50K out of the property, will it still cash flow with the original mortgage + the HELOC payment? Or if the new property you purchase is a screaming deal, then it may cover the HELOC payment too. Either way it comes down to the numbers.

    BRRRR decreases equity in your property. Decreased equity will increase risk, but also increases rate of return on your cash. It is a risk versus reward decision. Not a black and white answer, each situation is different.

    0Reply
  • Jason G.Pro Member
    Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
    7y
    Originally posted by @Tim Kaminski:

    BP,

    Have acquired my first property February of 2018.  Recently got a soft appraisal from my realtor and banker who told me they feel comfortable that I can get $50K out of the home to use on a new property.  I'm in Tampa, FL and mainly looking for 2-4 units so $50K doesn't get me anywhere close to my market prices($150-250K).  I know ppl invest with HELOCs and just wanted to understand how, exactly.  I put about 20K of my personal money into the purchase and rehab of property and was hoping to be able to pull out and recycle the money.

    Options as I see them.

    • Use $50K as a downpayment on property in my area.  That would mean I have loans on 100% of the property.  That sounds risky.  Do ppl do this?  
    • Use $50K as "cash" purchase of OOS investment properties in cheaper market.  Refinance property to pull money back out.  Repeat  Again, risky with unknown market.
    • Wait for $50K to grow to 100-150K.   Buy all cash and refinance. Risky as market looks like it may go down/level.  Can take years and years to reach this. 

    LOTS OF RISK. I want to grow and use the money I have created.  Any ideas?

    My strategy was take out the HELOC on my primary, move the money to checking to season for two months, use as down payments on investment properties. Rents cover payments on underlying mortgages, expenses, and HELOC payments. Save up for next down payment.

    0Reply
  • Kiley N.
    Honolulu, HI · Member since 2017 · 231 posts · 191 votes
    7y
    @Jason Gines What was the reason for the season? (no rhyme intended) I was under the impression that heloc funds are available for the DP.
    1Reply
  • Jason G.Pro Member
    Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
    7y
    Originally posted by @Kiley N.:
    @Jason Gines

    What was the reason for the season? (no rhyme intended) I was under the impression that heloc funds are available for the DP.

    I've read both. Wanted no issues. I did not want an issue with finding a property to purchase, entering into a PSA and then being told they wouldn't consider the funds in the HELOC.

    2Reply
  • Tim Kaminski
    OP
    St. Petersburg, FL · Member since 2015 · 317 posts · 71 votes
    7y

    @Joe Splitrock By "BRRRR decreases equity", you mean due to going from 100% equity to 20%, correct?

    @Jason G. So you fully financed 2 deals with HELOC down payments. Were you still cash flowing? Were these homerun deals or base hits? Would you reccommend this strategy?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Tim Kaminski:

    @Joe Splitrock By "BRRRR decreases equity", you mean due to going from 100% equity to 20%, correct?

    @Jason G. So you fully financed 2 deals with HELOC down payments. Were you still cash flowing? Were these homerun de

    als or base hits?  Would you reccommend this strategy?

    If you had a property that you owned free and clear, that would be 100% equity. If you had 80% LTV, then you would have 20% equity. If you had a loan for 100% LTV, then you would have 0% equity. Any time you pull cash out, it reduces equity but the percentage will vary depending on the value and how much cash has been pulled out.

    The reason banks usually require 20-25% cash into a deal is because they generally believe property values will not drop more than 20%. So from the banks perspective, this reduces risk. That is why people are required to get mortgage insurance when they buy homes with smaller percentage down payments. The bank figures even if they have to sell your property that they will get their money. 

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Jason G.:
    Originally posted by @Kiley N.:
    @Jason Gines

    What was the reason for the season? (no rhyme intended) I was under the impression that heloc funds are available for the DP.

    I've read both. Wanted no issues. I did not want an issue with finding a property to purchase, entering into a PSA and then being told they wouldn't consider the funds in the HELOC.

    When I am asked to provide proof of funds for down payment, the bank looks at my last two months bank statements. They do that specifically to make sure the down payment isn't coming from another loan. It doesn't necessarily hide it from the bank, because they will see your HELOC and know what balance is sitting on the account. They just want to see the cash is there. It would be pointless to go to the trouble of writing a loan, only to get to closing and find out the buyer doesn't have cash. You may not have to season, but it seems the safest thing to avoid questions/issues.

    2Reply
  • Joshuam R.
    Rental Property Investor · FL · Member since 2016 · 271 posts · 92 votes
    7y

    @Tim Kaminski Glad you asked this question. I just bought my primary this November for $135K, and is appraised by bank appraiser at $208K 

    Strategy will be the same, use a heloc as down payment on a good deal, will eliminate mortgage insurance using 20% down. The property will need to cash flow enough to pay the new loan plus the heloc.

    So I should get approx. $50K in the heloc ltv numbers. 

    looking at a duplex that I can buy approx. $150k, and rent each side for approx. $1,100

    I should be cash flowing worst case scenario $700-$800 after loan payments , expenses, etc.

    Thank to all who are sharing answers, is helping me also. Good luck Tim.

    0Reply
  • Jason G.Pro Member
    Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
    7y
    Originally posted by @Tim Kaminski:

    @Joe Splitrock By "BRRRR decreases equity", you mean due to going from 100% equity to 20%, correct?

    @Jason G. So you fully financed 2 deals with HELOC down payments. Were you still cash flowing? Were these homerun deals or base hits? Would you reccommend this strategy?

     Yes.  One was a very good deal.  The other was average.  Yes.

    0Reply
  • Jason G.Pro Member
    Rental Property Investor · Long Island, NY · Member since 2015 · 434 posts · 495 votes
    7y
    Originally posted by @Joe Splitrock:
    Originally posted by @Jason G.:
    Originally posted by @Kiley N.:
    @Jason Gines

    What was the reason for the season? (no rhyme intended) I was under the impression that heloc funds are available for the DP.

    I've read both. Wanted no issues. I did not want an issue with finding a property to purchase, entering into a PSA and then being told they wouldn't consider the funds in the HELOC.

    When I am asked to provide proof of funds for down payment, the bank looks at my last two months bank statements. They do that specifically to make sure the down payment isn't coming from another loan. It doesn't necessarily hide it from the bank, because they will see your HELOC and know what balance is sitting on the account. They just want to see the cash is there. It would be pointless to go to the trouble of writing a loan, only to get to closing and find out the buyer doesn't have cash. You may not have to season, but it seems the safest thing to avoid questions/issues.

    I do not believe it would get that far if they wouldn't accept the HELOC funds. They would see fairly quickly that the funds weren't there to purchase.

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @Tim Kaminski when I used the HELOC for my first down payment on my four unit, I did not end up keeping it open for very long. I ended up flipping my primary residence because there was a lot of equity that I had not been able to access. Appraisers were more cautious then due to the crash, and it was harder to access equity. The short answer is, I paid off my HELOC within 1 years time, and I was only paying interest the whole time. It had a very minimal impact on my cash flow, but I would not have been able to buy the property without the HELOC!

    as @f

    @Frank Wong mentioned, using a HELOC for a down payment could look risky to some people I am willing to take a bet on myself, and I am extremely cautious in other areas of my life (I drive a 2003 toyota matrix that I bought outright). Everyone has different goals, and you should survey all of these strategies so you know what options are available for you.

    1Reply
  • Zhou Ni
    Rental Property Investor · Chattanooga, TN · Member since 2018 · 4 posts · 0 votes
    7y
    @Frank Wong Very helpful info, my situation is very similar to Tim’s and been very confused about how to actually get my helco to work for me. Thanks for sharing your knowledge
    0Reply
  • Joseph Back
    Rental Property Investor · Montgomery, AL · Member since 2017 · 277 posts · 221 votes
    7y

    @Tim Kaminski First off congratulations man! The first is always the hardest. I would recommend finding some hard money lenders in your market and utilizing their money along with your $50k to buy, rehab, rent and refinance a 2-4 unit. Most hard money lenders will require you to have some skin in the game on your first deal with them so maybe they would lend 90-100% of purchase price and you use your $50k for the rehab. This lack of capital will continue to be a problem if you want to keep buying so the sooner you can get some deals done with a hard money lender and establish that relationship the better in my opinion.

    0Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    what kind of a deal are you looking at getting into? flip? brrrr? simple rental? I'd only use heloc on the first two and not on a rental that will casflow $100/mo pre-heloc pmt. Even if you do get a multi that cash flows nicely, what's the end plan on paying that $50k off when it comes due? There's gotta be some value-add in there somewhere, that would allow you to pay that heloc off quickly and move on. 

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    7y
    @Tim Kaminski I used a couple HELOCS to buy my first two properties 4 years ago and recommend it. I scrounged up cash and combined it with my HELOC money to pay cash for these two properties. I paid off the HELOCs within a year and a half and was cash flowing good coin. I sold one after 18 months and 1031d it to buy a 225k SFH and cash flow $450/month off it now. HELOCs opened some doors for me to get started. Cash offers got me these deals. Without a HELOC I wouldn’t have gotten these deals.
    0Reply
  • Jonathan Stone
    Investor · Columbus, OH · Member since 2015 · 15 posts · 6 votes
    7y
    @Tim Kaminski I've used a similar approach as @Steve Vaughan and @John Morgan. Last year I got a 30K HELOC from my single family rental and used it as a downpayment for a $125K 4 plex in Cincinnati. The cash flow from the 4 plex covers enough of the HELOC to have it paid in 3 years and still cash flow $100 per unit each month. The only downside with the HELOC is that the interest rate floats and we're currently in an increasing environment. I'd recommend finding a deal that allows you to pay off the HELOC quickly and still not a positive cash flow each month.
    0Reply
  • Justin K.
    East Texas · Member since 2018 · 206 posts · 138 votes
    7y

    Here is my plan to use the HELOC so correct me if I'm wrong.

    Obtain HELOC and use a percentage of it to put down payment/rehab costs on a property.(P&I plus HELOC payment)

    Wait seasoning period and REFI to repay HELOC back returning HELOC balance to full strength.

    Wash, rinse, repeat. 

    0Reply
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