HELOC for down payment?

Question

Has anyone used a HELOC on their primary residence to finance their first biggish deal? I found a decent deal that works with a 20-25% down but when I factor in paying back even the minimum on the HELOC (1% of outstanding balance) the numbers go south quickly. Key numbers:

42 units, $1.6M sale price; EGI - $234K; Expenses - $122K

There's room to reduce expenses, do some value add and tick up the rents overtime...So, thoughts? And...is this too big a swing for my first commercial deal? Thanks for any thoughts.

Ben Steelman · Answer

@Jon Hilfiger here are the details to the deal I mentioned. My partner @Joseph Koury did a beautiful job in outlining it. Needless to say, we love the KC market and are actively pursuing other projects https://www.biggerpockets.com/forums/850/topics/811515-7-unit-condo-project-in-westport-kansas-city?page=1#p4770159

Ben Steelman · Answer

I absolutely did! By doing so, it actually got me off the sidelines and into the game! Best decision I've made in recent memory. If you've been on the sidelines for a awhile, just jump. Take action my friend!I live in Kansas City and own properties in the Multifamily space. If you're looking to connect and network in the KC market, let me know. Cheers!

Spencer Gray · Answer

I've found that you can accomplish much more with partners than you would be able to on your own. If it's a good deal, partner with someone who has done a few of these to leverage their experience.

Bill Boudreau · Answer

Jon, congrats on looking at multifamily.  I've used the HELOC on my primary residence to purchase a 12 unit about 3 years ago, and a 33 unit in January 2019.  I believe it's a good strategy, but only for the right property.  I'm pretty conservative so I wanted to make sure the deal was in a good location with a value add component.

On the 12 unit, I partnered with my son.  We were also doing a flip at the time, and when we completed / sold the flip, the profits covered about 1/2 the amount I'd used as a down payment for the 12 unit.

The 33 unit I purchased on my own.  I've been able to significantly increase rents as units have turned over, and also added a RUBS to help cover the water / sewer / gas costs (electric is separately metered).  Starting to look at cash out refi options to pay off the HELOC and get ready for the next purchase.

My thought on using a HELOC are to make sure you have a plan to pay it back.  If you can't replenish your funds that way, you're going to run out of money at some point.

Also, keep in mind that by using a HELOC you're essentially doing 100% financing on the rental property.  There's always a cost to the funds you're putting into a property, you're either going to pay interest on your HELOC, or you're going to have to take the money out of another investment.  You've got to make sure you're satisfied with the ROI.

Marcus Auerbach · Answer

Jon sounds like you are on the fence with the deal. I think If the deal is strong enough you would not be worried about going all in, HELCO and stocks. A partner is less desiable than a HELCO: more expensive for sure and also a partner (unless silent) has an opinion.

Jon Hilfiger · Answer

@Jaron Walling thanks and yes under rented a bit now. I’m definitely struggling to find ways to make the math work and get into the game with a good first MF.

Marcus Auerbach · Answer

Are you running your numbers as is or proforma? The cost of your HELOCs probably around 4% - if you can't make 4% on your own cash it's obviously not a good deal. On a deal like this the only question is how much upside do you have? Cashflow is just what keeps the lights on, while you get there.

Cost per unit seems very cheap to me, which makes me question the neighborhood and the tenants. A cheap deal ("but the numbers are good!") usually comes with more risk than a not so great one - where you pay more per unit, you may have greater upside and lower risk.

Alex Olson · Answer

@Jon Hilfiger yes you can use a HELOC to finance any part of a deal you need to.

Jon Hilfiger · Answer

@Kent Ritter good input and totally leaning this way...I’m ok being leveraged but not way over leveraged. Still on the prowl for that first good property as well. No rush but I’m ready to take my portfolio to the next level with MF. Thanks.

Kent Ritter · Answer

I would stay away from using a HELOC to acquire a property unless you have a very clear business plan and a short timeline.  HELOCs are good as a bridge if you have a clear out to repay the money like @Bill Boudreau's example.

I agree with @Spencer Gray find a partner to fund all/part of the deal and contribute your sweat equity by finding, closing, and running the deal.

HELOC for down payment?

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