Happy Labor Day to everyone! So here's my situation and I'm looking for guidance. My very first property that I've bought, a single family home, is about to be paid off by early next year, April 2020. I'm working on property #5, a duplex in Pittsburgh, PA using my own funds, stocks, mutual funds, and some cash for a down payment. However, with that SFH being paid off, I want to use a HELOC to fund my next property and future properties. Doing my research on the internet concerning HELOC, I can get a loan of up to 80% of my property. This SFH is a starter home and it's worth almost $100,000, so, I'm looking at close to a $80,000 HELOC.
My concern is I'm taking a loan to purchase another loan (HELOC to fund a mortgage) and I still have to pay for both the HELOC and the mortgage for the new property(ies). Of course, I'm going to do my research and make sure the numbers add up to where the rental income from each property can pay for the mortgage and into the HELOC. Paying off the HELOC should be the number one priority which could take several years by which time, I'm not able to receive any income from those properties.
Is this fiscally sound? A loan for another loan? I'm taking a loan to fund another loan. I could go into my savings and investment and cash them out for the down payment and don't have to worry about a second loan (HELOC). However, used in the right hands and not mismanaged, a HELOC is another avenue or tool in which I could tap for capital for major purchases.
Anyone have any experience using a HELOC to purchase investment properties and did it work for you? Or is this something to be avoided?
V/R, Tim Rostro
Every investor has his own thresholds on what amount of debt is "ok." That said, when I had my last HELOC (through PenFed) it was an interest only loan, and my mortgages are amortizing. The only problem that I have seen arise is when the HELOC is close to maxed, it is like a credit card that is maxed. The debt to income ratio can be thrown off. Just watch your numbers; it sounds like you already do.
I have used HELOC's off of one property to buy the next one about three times. They were always interest-only, if not my high DTI would have never gotten me approved for another mortgage.
HELOC is variable interest, currently going at 5.1-5.3% APR for 10 years.
@Tim Rostro I have used this approach to fund the full purchase or down payment for several duplexes and triplexes in Pittsburgh. While it is a "loan for another loan" as you said, if done responsibly it can be a terrific way to grow your portfolio faster than you otherwise could with your savings. Before I utilize funds for my line of credit, I think about the worst case scenario for the property I want to buy, as well as the properties I already have in my portfolio. If I can still meet all my debt obligations and expenses in the worst case scenario, then I move forward with purchasing the property.
In using this approach of looking at the worst case scenario, consider running a model where you have 50%-60% occupancy in your existing units, interest rates go up 2%-3% over the first 5 years of the loan, and (if there's rehab) that the costs are 25% above what you estimate. If your portfolio can handle these types of occurrences and you can still make your HELOC payment + other mortgages and expenses then I think you should feel comfortable moving forward.
Important you consult your accountant, but it's my understanding you use the Heloc strictly for the investment & do not mix personal use with the investment use so the interest is tax deductible. A side benefit to the Heloc, whether you use it or not, is it poison pills or gives you asset protection on that property. Like the others I've used Heloc several times to cash purchase & paid off with refinance. Good luck
Also, given the anticipation of possible recession, you may want to consider a HE Loan instead of a HELOC (unless you're really close to doing that next deal). Reason being that if recession hits and your local RE market takes a hit, your bank can close that line of credit on you before you use it (which is why cash it king). If you use a HE Loan, they can't take the money back from you and you can get a fixed rate. Just food for thought. That said, you could still do the HELOC but watch the market and take the advance if things get questionable.
Point being - just remember an unused HELOC is not a guaranteed source of funds.