Confused about using HELOC to buy rental properties...

[Mike T.]

I'm just starting out and would be incredibly appreciative of feedback on something I am a tad confused about. I have a primary residence with a fully paid off mortgage (I am very grateful for this but at the same time I have all this equity TIED DOWN in a liability).... so I have about 440k equity that is tied down as that is about 80% of the tappable equity. 

What I am confused about is, if I get a HELOC for 300K and this HELOC has a fixed 8% APR (I would try my best to get a fixed rate HELOC vs variable), and I (for example) then buy a 150K house and put down 20% (equals 30k). Then my HELOC is going to charge me 8% interest on the 30K and then the mortgage lender is going to charge me 7% on top of that for the remaining.

I am having trouble seeing how I could even cash flow from such a rental when I have 2 dfiferent entities (HELOC and also a mortgage lender) charging me interest? Am I missing something in regards to how this works? It would make sense if I was using my own cash... but it's not making sense in how this works when involving a HELOC at 8% APR because HELOC is charging me massive interest... unlike if I was using spare cash.

Thanks in advance!

[Chris Seveney]

@Mike T.

You cannot cash flow with 100% leverage the majority of the time. A line of credit is good if you bought an asset and were rehabbing it to sell but for keeping it as a buy and hold it does nothing for you - again unless you were trying to do a major renovation to enhance value and refinance

Otherwise you are just overleveraged