I am considering a HELOC to purchase my first 2 family rental property. The property will be rehabbed and property managed all included with the purchase price. Is a HELOC a good idea?
@Naimah Lewis keep in mind that with the new tax laws you may not be able to write off HELOC interest or so I heard. So you can use the HELOC as a short term instrument and then refinance it out but make sure you can get the leverage you want.
@Naimah Lewis Welcome to BP Naimah! Purchasing with a HELOC is a great idea. If you are already approved you can make a cash offer. Have the tenants screened and leases reviewed by the PM, and get the property inspected by an inspector you hire. Make sure everything and everybody checks out before you submit an offer. All the best!
@Naimah Lewis keep in mind that with the new tax laws you may not be able to write off HELOC interest or so I heard. So you can use the HELOC as a short term instrument and then refinance it out but make sure you can get the leverage you want.
@Naimah Lewis I think a HELOC is a good idea to jump into rentals. Just keep in mind that any costs from the HELOC should be assigned to the rental properties. In other words, you are borrowing 80% of the rental property cost from the bank but you are borrowing another 20% on the HELOC. It is very tough in this market to make a rental property pencil out if you are borrowing 100% of the cost.
Let me give you an example. You buy a rental property for $100k using a 80% bank loan at 6% interest. You borrow the $20k downpayment plus $5k in closing costs and $5k in rehab costs from your HELOC also at 6% (note $5k in rehab costs in nothing so the house better be newer and in great shape).
Let's say you rent the property out for $1000/month and using the 50% rule you have $500 in expenses each month.
Your mortgage payment will be $480/month. So you're positive $20/month cashflow right? well what about the HELOC? You will owe $150 a month just in interest on that. So you're negative $130/month on this property.
Do that 100 times and you're in real trouble :)
I don't mean to be too negative. If you have really good deals especially if you're doing value-add/rent raising HELOCS can be a very effective strategy.
But realize you are borrowing 100% of an investment which is inherently very risky.