Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
Hello everyone,
I just found the bigger pockets podcast and joined. I’ve been loving the content. I have been using a Heloc to purchase a few properties because I don’t have a load of cash. I understand the numbers will sort of dictate the answer and in general is a heloc a good method to finance down payments for properties? Thanks, Brian
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
Using a HELOC, you can potentially buy a property without any of your own cash into the deal. I purchased a short term rental using a HELOC as a cash purchase. After paying the HELOC and other expenses, we are netting around $500 a month. That is with $0 invested, so there isn't even a way to calculate ROI. I am applying the cash flow to principal pay down on the property, so we are gaining equity.
Just be aware that when you are using a HELOC to finance a down payment or an entire property, you have no equity in the property. There could be risk if the property value dropped and you needed to sell. In a quickly appreciating market, this is not an issue, but every market is different and the future is unknown.
Bottom line, make sure the property has enough cash flow to cover debt service (loan payment) and all expenses. When I say all expenses, don't forget to include allocations for vacancy and repairs.
Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
5y
Hi @Brian Plajer, welcome to the BiggerPockets Forums!
As long as the numbers works, a HELOC is an absolutely brilliant source of down payment funds! By "numbers work" I mean that the purchase property can pay the debt on the first mortgage and the HELOC funds. If you're taking into account both of these in your calculations and the properties cashflow as you need them to, then that's phenomenal!
Omaha, NE · Member since 2020 · 611 posts · 665 votes
5y
Using a HELOC for everything is a good idea. HELOCs are the best financial instrument ever designed. Partnered with credit cards, they allow the common person to grow wealthy.
Of course, used inappropriately, a HELOC, like a credit card, can sink a person in bankruptcy levels of debt too, because they're the most powerful financial tools.
Real Estate Agent · PA · Member since 2021 · 240 posts · 131 votes
5y
Welcome to Bigger Pockets! HELOC is a viable option for purchasing real estate as long as the numbers make sense. Just be carful to not over leverage yourself in case of shortcomings
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y
Using a HELOC, you can potentially buy a property without any of your own cash into the deal. I purchased a short term rental using a HELOC as a cash purchase. After paying the HELOC and other expenses, we are netting around $500 a month. That is with $0 invested, so there isn't even a way to calculate ROI. I am applying the cash flow to principal pay down on the property, so we are gaining equity.
Just be aware that when you are using a HELOC to finance a down payment or an entire property, you have no equity in the property. There could be risk if the property value dropped and you needed to sell. In a quickly appreciating market, this is not an issue, but every market is different and the future is unknown.
Bottom line, make sure the property has enough cash flow to cover debt service (loan payment) and all expenses. When I say all expenses, don't forget to include allocations for vacancy and repairs.
Absolutely HELOC are great forms of down payments. The equity in your home is actually losing its purchase power at the rate of inflation (-3%) so pulling the equity out and buying a income producing asset that has a solid overall return on investment is intelligent!
I just found the bigger pockets podcast and joined. I’ve been loving the content. I have been using a Heloc to purchase a few properties because I don’t have a load of cash. I understand the numbers will sort of dictate the answer and in general is a heloc a good method to finance down payments for properties? Thanks, Brian
You know you already answered your own question, right?
ie. How else could have bought those "few properties"?
And yes, you've already also worked out that you need to focus on the cash flow aspect.
Rental Property Investor · Chalfont, PA · Member since 2021 · 189 posts · 90 votes
5y
Thanks Brent! Yes, I sort of answered my question but to do another 5-10 deals the HELOC won't cut it. I'm trying to learn more about other options that don't involve borrowing money from Friends and Family. I love the podcasts and do find them super helpful
Rental Property Investor · Member since 2020 · 1k+ posts · 1k+ votes
5y
A heloc is my primary tool for purchasing more properties. I am currently refinancing my house and the payment will stay the same but I can lock in a lower interest rate but plan on taking a heloc on top of it. I put all my profits into the heloc to pay it down as fast as possible and as soon as I have enough I buy another. I also took money out of the heloc about this time last year and invested it all which was risky but has paid off. The biggest risk with them however is the interest is not set and can increase so be sure you plan for that, these low rates can't last forever which is why I refinanced part of mine.
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
5y
@Brian Plajer I started using a $60k HELOC on my first flips, and grew it over the years to a $421k HELOC. I have also used HELOCs for down payments and all said and done, created millions of dollars in RE net worth all leveraging my HELOC. The key is I never over pay for a property, ever. HELOCs were my lowest cost financial vehicle to access cash.
Dentist · Taylorsville, UT · Member since 2013 · 102 posts · 68 votes
5y
@Brian Plajer
Yes just remember most conventional lenders require you do you have reserves in your account for a few months before closing so you may have to draw the cash out well in advance of the deal.
My credit union does a fixed for five years HELOC which I'd recommend so you don't get upside down on the deal.
Just remember “if the math doesn’t work, nothing else will.“
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
5y
100% leverage is IMO not a very safe place to be..... not unless you have enough cash in reserves to cover all your expenses for a year..... i mean what happens when a tenant gets in and decides not to pay rent? how will you pay the mortgage AND the heloc payment? Or what happens when you have a major repair and have to take the home off the market? or what happens if..... you fill in the blank....... Also, dont mortgage folks want to know where the DP is coming from? dont they want a certain DTI ratio? or is this for a personal residence?
Thanks Brent! Yes, I sort of answered my question but to do another 5-10 deals the HELOC won't cut it. I'm trying to learn more about other options that don't involve borrowing money from Friends and Family. I love the podcasts and do find them super helpful
Did you read where others here only used their HELOC as deposits, borrowing the rest against their new investment? And the next stage of that process is to (6-12 months later) refinance against that new investment.
But how can that be done, if you already borrowed the maximum 75% in the first place?
The answer is: You need to have bought a bargain, meaning your later revaluation & refinance will get you all your original outlay back. Get it? Got it. Good. Cheers...
Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
5y
@Brian Plajer
I personally don’t like heloc for buy and hold investments. You are basically paying interest on 100% of your investment dollars. The numbers can work, but it makes it more difficult.
I think heloc is better suited for short term investments like a flip. So that you can pay yourself back and pay off your heloc faster.
Real Estate Broker · Helena, MT · Member since 2016 · 65 posts · 28 votes
5y
@Brian Plajer helocs are also short term loans so keep that in mind. If you are doing this to hold a property for 10 years probably not your lenders fav. Either think of a way to pay it down faster than a long term loan.