Rental Property Investor · San Jose · Member since 2020 · 44 posts · 22 votes
Hello Bigger Pockets Family!
Just wondering, if you are a new investor buying a rental property and you have an equity from your personal home, which one would you use for a DP? HELOC, Home Equity Loan, or your savings? and why?
In regards to HELOC and Home Equity Loan, are this both risky? what are the things to watch for or be careful of?
Thank you in advance! your response is much appreciated!
I did a HELOC since I didn't have any savings at the time. And I did not have a deal either. With a HELOC I could let it sit there and not incur any cost while I looked for a deal. There was no closing fees either. Dont know if other banks do closing fees on a HELOC.
I've since used the HELOC to pay for DP and reno and that property is cash flowing (small bec of HELOC payments) but still cashflow.
I'll be able to do a cash out refi and payoff most of what I owe on the HELOC in a month or 2. Will increase cash flow by about 50 dollars since mortgage cost increases too.
My advice would be the less sexy approach. I am never a big fan of pulling out equity or creating a HELOC loan unless you already have strong savings positions with cash reserves in place. Those approaches are something you can always use, but if you have the savings and the cash reserves in place, that would be my recommendation. You can always get the HELOC loan, but you don't have to use it. This would give you more flexibility.
@Michelle Harrington There are advantages and disadvantages to using a HELOC versus your savings.
Do you have adequate savings in case of an emergency? You should always have a few months worth of savings to cover your expenses. If this is separate from an emergency fund, then the advantage is there is no payments that need to be made if you were to use these funds to fund your down payment.
The advantage of a HELOC is the ability to tap it when you need it. You also only make payments on what is borrowed. During the withdrawal period, you are typically only paying interest. The disadvantage is the interest is a little higher than if you were to do a refinance to pull out the equity.
Which one you use is really up to your comfort level. You could also consider a combination of both too to reduce potential risks and the amount you need to borrow from your HELOC.
I did a HELOC since I didn't have any savings at the time. And I did not have a deal either. With a HELOC I could let it sit there and not incur any cost while I looked for a deal. There was no closing fees either. Dont know if other banks do closing fees on a HELOC.
I've since used the HELOC to pay for DP and reno and that property is cash flowing (small bec of HELOC payments) but still cashflow.
I'll be able to do a cash out refi and payoff most of what I owe on the HELOC in a month or 2. Will increase cash flow by about 50 dollars since mortgage cost increases too.
I see no downside to getting a HELOC and having it in place (unless you think you would be tempted to use it for purchases other than real estate or wise investments). I'm a big fan of using a HELOC with the BRRRR strategy to buy a property and then refinance and pay back the HELOC. If you're making wise purchases with the intent to pay it back off in 6 months, its a solid strategy. I will say though if you have enough cash liquid (not in a retirement account, etc that is difficult to access without a penalty) I would use the cash first instead of paying interest on the HELOC and let the HELOC be your emergency fund. If you do not intend to BRRRR, I would definitely use the cash for the purchase, and the HELOC can serve as your emergency fund until you save up 6 months of reserves.
I would only recommend the HELOC for short term loans. Use it for a BRRRR approach, so you can get your money back in 6 months or so. You'll only owe on it while the money is drawn down, then you can pay it off on the refinance. I wouldn't pull a HELOC out for a down payment that you plan to buy and hold though. The reason is because you would essentially be financing 100% of the deal, which usually results in poor cash flow.
I see your point. I understand what you mean and of course it makes sense! It's more of an advantage to use my own money to fund the DP and save the equity of my home in case I needed it. Thank you!
Thank you @Ryan Howell! You helped me to have a clear understanding and finalize my decision. I will use my savings first and will remember that I have HELOC to pull anytime I need it. I will re-assess myself after couple of months to see if I would need the HELOC.
With HELOC you are putting your personal residence at risk. When we started out We were very risk adverse and kept our primary residence totally separated. I think you should hold the HELOC as your back up and if possible use other funds for a down payment.
HELOC is a great option. You can stay invested in other assets instead of sitting on cash while you try and find a real estate opportunity. Use the HELOC only when you need it, so you aren't paying interest otherwise.
I only like it as a short-term loan to myself, though. Its much cheaper than hard or private money. But with a variable rate, and it collateralizing my primary residence, I like to refi into longer-term fixed rate debt if I'm going to hold. Then payback the HELOC with the refi money.
If you're using it as a DP, I'd just have a plan as to how you can pay it back asap.
I'm a new aspiring investor absorbing as much information as possible. I'm reading currently reading a book on BRRR. Do you have any more info / resources on buying a house using a HELOC as DP and then refinancing to pay off that borrowed money? Is it because you refinance to the new appraisal? Thanks in advance!
@Joseph Hamer - there are a lot of great BRRRR resources on here, but basically you need to buy below market, know the ARV that you get close to 100% of your purchase and rehab back...If you buy a property with for $60k, $20k rehab and ARV is $100k and your lender will give you 80% LTV, you can make it work (this is overly simplified, there are other fees, closing costs etc, but gives you the idea).
I would recommend having at least one years worth expenses set aside in cash and once you get to that point anything above and beyond that can be used for down payments etc. A HELOC just adds risk and may make it so you dont qualify for a loan so be sure to ask your mortgage broker how a HELOC would affect your ability to get a mortgage..... Also, I would be careful using debt until you are confident your methods work .... but I am a very conservative investor who likes to have reserves to weather the storm.