cons of using HELOC to buy investment property

Buying & Selling Real Estate
5yFollow

cons of using HELOC to buy investment property

David O.
Member since 2021 · 10 posts · 5 votes

I am thinking about taking out a HELOC (~$1M) to buy rental properties. I do not have any rental properties in mind yet and am planning to apply for a HELOC, after approval I will then look for suitable properties to buy. After I purchase the rental property, I plan to cash out refinance - I heard that if I do a cash out mortgage within 30 days I will qualify for the same lower rates as a purchase loan. The reason to use HELOC to buy the property instead of using a purchase loan is because I think it will take a long time to close (my last purchase in June of this year took 60 days to close). Also, cash offer using HELOC will be more attractive to sellers.

I have never done this before. Is there any potential problem with this method? Specifically, will a HELOC negatively affect my mortgage application for the cash out refinance of the newly purchased rental property? I know that lenders consider debt to income ratio, but am not sure if a large HELOC will be considered by the lender negatively.

If this is not the best approach, any recommendations? Thanks!

0Reply
35 views

2 Replies

Jump to latestLatest
  • Winston CovingtonPro Member
    Realtor · Santa Ana, CA · Member since 2014 · 131 posts · 111 votes
    5y

    1. Most HELOC's come with a variable interest rate which are low now but definitely can and will increase. 2. Cash offers normally do negotiate a better price and shorter escrow period. 3. The holding period for a cash back refinance on an investment property is normally 6 months and has been as long as a year in the past. 4. Your HELOC will definitely be used in your debt to income ratio. 5. You may find that you can only get apprx. 75% loan to value on your cash back refinance. 6. You may be required to have 6 to 12 months liquid reserves for each investment property. 7. Once rented, most banks will only count apprx. 70 % of the rental income which increases your debt ratio. 8. Non owner occupied investment loans come at a higher interest rate and costs than a owner occupied property. 9. When the market begins to move in a negative direction, Banks have been known to freeze and greatly reduce the amount of useable funds in your HELOC. 10. HELOC's can be a great investment tool as long as you use them wisely and understand their limitations.

    0Reply
  • David O.
    OP
    Member since 2021 · 10 posts · 5 votes
    5y

    @Winston Covington

    Thanks!

    I am most concerned that HELOC will be considered in debt to income ratio. How will it be considered? Say if I have borrowed $1M with money interest payment of $1K, will $1K be added to my monthly debt? $1M amount will not be considered, only the monthly amount will be considered? Compared with just a purchase loan, will heloc make me more difficult to afford the rental property?

    Assuming the loan for the rental property is $800K with monthly mortgage and property tax of $2000; rental income of $1600; my primary home monthly mortgage and tax are $3000, and my monthly W2 income is $10k.

    Case1: with heloc, debt is $1000+$2000+$3000, income is $10k plus 0.75*$1600=$1200, which totals $11200. My debt to income ratio is $6000/$11200=54%.

    Case2: without heloc, I buy the rental property with loan on day 1. Debt is $2000+$3000, income is $10k because on day 1 I don’t have rental income from the rental property yet. So my debt to income ratio is 50%.

    Is the above calculation correct? So the heloc makes my debt to income ratio worse?

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free