HELOC to make downpayment on Multi-Family?

17 Replies

It would seem that a HELOC for a down payment on a new investment property when it comes to SFR or 2,3,4 Plex is a no go due to Debt to Income ratio.

But can I use a HELOC as a down payment on a 5+ unit?

@Michael Randle I don't think you can generalize like that. I'd case it depends on a case by case basis. I know people getting HELOC to buy SFH as investments. You'd need to determine whether it makes sense down the road. Also, keep in mind if HELOC Is used to purchase an investment property the interest is tax deductible! So you get a double benefit!

@Michael Randle Lots of people use HELOCS to get down-payment money for investment properties and it really doesn't make a difference how many units the property has. The real question is will the income of the property support the debt service of both the primary loan plus the debt service from the HELOC. A commercial lender would probably look at that more reasonably than a conforming residential lender.

But you need a pretty darn good deal to support 100% debt. They are looking at your income and proposed debt for a good reason. It's not really in your best interest to lever up to 100% unless as I said it's just a killer deal.

Well I have $270k of equity in our primary residence and house hold income is $130k a year with only a monthly mortgage payment of $1600 being the only debt. So I am not too worried about supporting the debt of a small (sub 10 unit) multi-family. Just the main hurdle is getting the 70%-80% LTV, and hence the 20-30% down payment, that is generally (from what I have read so far) the requirements for a commercial loan of this size.

After you get the loan, they will look at 6 months in reserves for the property . So if you are going to pull HELOC, make sure you pull enough to get the 30% downpayment plus 6 months of expenses .,,...

Debt to income will come into play if you use conventional financing. You can buy a smaller multifamily and use an asset based, commercial loan, where DTI is not a factor. You'll pay higher interest for these loans but if you find a good deal on a 4-plex, dont let DTI stop you. There are ways around that

Some lenders will allow this.

-it really just depends on the how the underwriter assesses it.

-If your DTI is still good (the payment on HELOC is HIGH!) @Jason D. I think you're being too generous about  them not caring about personal DTI. as a first multi and not much history, personal financials will be an important factor)

-credit score doesn't get whacked too bad after your credit utilization goes way up

-have 6 months of reserves, and maybe more

-property is profitable to support both debt services

then you can probably knock this out. Not all U/W will be game for it.

@Alexander Felice I'm refinancing with a lender right now that never asked for my income or paystubs (1st true investment property). They look at the property income to debt, equity in the property, and my LLC bank statements. Just saying that they are out there and if you have DTI concerns, you still have options.
Originally posted by @Jason D. :
@Alexander Felice I'm refinancing with a lender right now that never asked for my income or paystubs (1st true investment property). They look at the property income to debt, equity in the property, and my LLC bank statements. Just saying that they are out there and if you have DTI concerns, you still have options.

 certainly not all lenders are equal.

I'm an underwriter myself, we wouldn't go by property only for someone new, like (I think) OP is. do you have a proven track record with RE? is this a reasonable step up from your previous portfolio? you said you had a refi right? MUCH different than an upfront purchase.

all situations are different.  maybe we are both speaking from anecdotal experience.

best thing OP can do is talk to lenders and find one that will make this work. I agree that's possible under certain parameters.

@Alexander Felice agreed, all circumstances are different. This is my first true rental, other than a primary turned rental. I just want the OP to know that there are always options, regardless of your situation. I dont like it when people get to a roadblock and give up because they thin that they dont have options. Dont use excuses to stop you from moving forward, simply find a way to make it possible.
Originally posted by @Jason D. :
@Alexander Felice agreed, all circumstances are different. This is my first true rental, other than a primary turned rental. I just want the OP to know that there are always options, regardless of your situation. I dont like it when people get to a roadblock and give up because they thin that they dont have options. Dont use excuses to stop you from moving forward, simply find a way to make it possible.

 my intent wasn't to throw up roadblocks, just setting expectations.

the expectation of banks is usually for the borrower to have skin in the game, this is not a hard and fast rule, but one that shouldn't be expected to overcome. Shifting equities around can certainly overcome this. roadblocks just mean it requires a detour ;) ;)

Originally posted by @Jason D. :
@Alexander Felice I wasnt implying that you were the roadblock :-) the OP mentioned personal DTI as a potential problem, and that shouldn't stop him from moving forward.

 I didnt' take it that way ;) we always cool baby

hard to say what OP will run into. he says DTI is low, that's great, he has equity, that's great, then why doesn't he have any cash? again, just my perspective because I do it for a living, I'm required to maintain a high level of suspicion. based on what he says it sounds like there is certainly a way through this, like you said.

I've used HELOC's to fund multiple purchases in the past. I use the income generated from the new property to pay it down, and then completely eradicate what's left using a cashout refi on the new property (once I've owned it long enough to do so). Basically the BRRRR method, but using the HELOC to fund the deal.

Originally posted by @Michael Randle :

It would seem that a HELOC for a down payment on a new investment property when it comes to SFR or 2,3,4 Plex is a no go due to Debt to Income ratio.

But can I use a HELOC as a down payment on a 5+ unit?

I have a HELOC right now and I am shopping small multi properties looking at using conventional financing. I asked my lender if funding the entire down payment from my HELOC was a problem and he said it made no difference.

@Michael Randle you certainly sound like you have the financial strength to handle it and the residential conforming rules are just getting in your way. So I'd say a commercial loan will probably work out for you. But, my main point still remains. You are borrowing the entire purchase price so you need to make sure it's a good enough deal to support debt service on the primary mortgage plus your heloc. 

Plenty of people did exactly what you're describing in 2006 only to see the value of both properties drop 30% in value and their occupancy and rents drop. 

I'm not saying don't do it, my point is just make sure you've thought through what that would be like.

I used HELOC on personal residence as down payment for a multiple duplex purchase years ago. I was a “seasoned landlord” at the time, meaning 2yrs of LL on my tax returns, so I was credited 75% if current rents (they were all occupied) toward my income in the DTI requirements. All conventional 30yr fixed 25% down loans. This can be done. Just make sure you have the cash flow to back it up if things get difficult, otherwise it could get interesting.

As a side note, my HELOC has a fixed rate option where I can lock in a rate for 5, 10, or 15yrs. They used the 15yr payment plan to calculate DTI.

I'm with @Matt Nolan , @Marco G.@Michael Randle . Have you talked to banks about what you're trying to do? Seems like you may have some bad intel or may need to keep searching for a lending partner who understands. The local 1-2 location banks typically have the most flexibility when it comes to creative financing.