HELOC to Fund Downpayment on Next House Hack?

Question

Hi everybody! I bought my first property in September 2023. It is a duplex and I live in one side and rent out the other. since purchasing the property with a 10% down portfolio loan through a local bank, I have done extensive repair work and renovations. The work together with appreciation suggest that I will now be somewhere between 20 to 25% equity. The bank is coming out for an appraisal so I can drop my PMI (woohoo!!).

I would like to get into house hacking another small multifamily as soon as possible. A local bank will give up to 100% LTV HELOCS (up to $400k). I am thinking about taking out 5 to 10% to fund a down payment on my next live in multifamily house hack. On property number one, I would cash flow $750 a month after mortgage, taxes, and insurance if I also rent out the unit I live in. After the HELOC, it would drop down to about $450 per month.

My goal is long term equity and appreciation, and not cash flow. Is this a wise decision to use a HELOC on property number one that only has 20 to 25% equity in it to fund a down payment for a live in house hack in multifamily property number two? I have cash reserves and money in retirement accounts, but I don't want to dip too deeply into my reserves. Thoughts? For reference, I am 30 years old and not married. Having a real estate license, I would credit the commission payed out I would receive for being my own agent towards closing costs for the new property.

Benjamin Aaker · Answer

I'm a fan of using the HELOC to help purchase new property. The most important rule is to have the cash flow of the new property be able to pay all its expenses, mortgage, AND the line of credit back. You clearly have factored this in already. With only that information, I see no reason not to.

I am surprised you found a bank willing to do this. Make sure you tell them exactly your plan and make sure there isn't a catch.

Another thought - are you considering an FHA loan on the next one? You could bring less down and possibly have a lower interest rate since you will be living there. Great start on investing!

Albert Bui · Answer

If he does consider using FHA on the next one he'd be subject to many rules that will hinder his pick of FHA for the purchase assuming he vacates the current property to purchase the "new."

The rule he'll encounter is the 100 mile FHA rule.

It can be planned around but he would have to move out of the current residence first for 6+ months then apply using FHA from the hypothetical rental to purchase using FHA (mortgage planning counter to the rule).

He could also use conventional 5% down (Fannie or Freddie Mac) to avert the situation above with FHA since conventional does not have guidelines that put conditions upon obtaining subsequent properties (such as that 100 mile FHA rule). The reason FHA does is becaues it was designed for primary residences only and wanted to make sure the program wasnt being used by borrowers to rapidly acquire real estate portfolios (which many on this site are doing).

There are even tougher rules if the property being moved out of is currently an FHA loan (which it is not according to the OP it was a 10% down local community loan program / credit union) such as a requirement for 25% equity on the vacating property (one you're about to leave). This rule is for having multiple FHA loans and moving out to purchase another using FHA.

Good suggestion though, but its good to incorporate the mortgage planning end as well if you plan to use specific products in the toolbox to execute the game plan rather than finding out later and having to use plan B (conventional or other options).

Albert Bui · Answer

@Scott Brockelbank Jr. most heloc's we have access to at the moment are at a higher LTV when you do live there, 10-15% higher loan to value if you live there. The moment you vacate or move out that LtV drops from 90-95% down to 75% or less as an investment or non owner occupied property.

So it's definitely best to get the HELOCs while you're still occupying and plan ahead for sure.

Albert Bui · Answer

Ive used HELOC's to purchase properties, shoot I've even gotten cash out auto loans on my used acura tsx to buy a fourplex to bridge the gap. At the time I needed all allowable sources possible to gather the down payment to buy so I had to be pretty creative.

Whether its best to use HELOC's or not depends on what other choices you have. I would review all the cost of capital for the sources you have, example would be:

- your cash - while it seems free or zero cost your cash should always be assigned an opportunity cost such as 4.25% sitting around in a savings or CD account with no risk as your min cost of capital (cheapest source of capital)

- personal lines of credit with no security or asset backing it or called signature lines or signature loans at credit unions and community banks, these are usually prime + 2-4% so probably 9.5-11.5% roughly

- HELOC's or secured by real estate, lines of credit usually prime + 0% up to prime +3% or so, 7.5-10.5% rates

- fixed mortgages on your real estate like a cash out refinance at the moment can be around 6.75-7.5% 30 year so this one costs some where between your cash above and your lines or personal loans. This one is limited as it can only go up to 75% LTV on your property value or up to 80% (rare instances up to 90% LTV)

- 401k loans if you have a retirement or self directed solo 401k plan (self employed) might be 6-8%, you're borrowing from yourself but IRS rules dictate you gotta pay your retirement plan a reasonable market rate. You can borrow up to 50k or 50% from these plans WHICH ever is lower

- Cash value life/permanent insurance policies - these are 5-6% roughly for policy loans at the moment if you have a life policy you could consider accessing your cash value for a policy loan to fund your down payment or use the cash value within your policy as cash reserves

- stocks/bonds/portfolio - you can typically use 70% of the balance as reserves or borrow a SBLOC (securities backed line of credit) on your stock porfolio at certain brokerages to access a line against the value of your stocks typically brokerages will give you 30-50%, sometimes 60% of your stocks depending on your Beta or risk of your portfolio (lower risk stocks will get higher LTV % and lower rate and vice versa high risk stocks you'll get less LTV on your line and higher rate).

Hopefully that is enough ideas to jump start the mortgage planning on capital sources but you can plan ahead with these. Alot of these will require some tax planning, financial planning, and action to set in place prior to your real estate game plan.

Best of Luck,

Scott Brockelbank Jr. · Answer

Congrats on creating that equity and building your portfolio! This strategy is great as others have said. I would always get a HELOC for the maximum amount while you are living in the property. Very few banks will offer a HELOC if you don't live there. If you get it now you are basically grandfathered in. Keep your funding options open!

HELOC to Fund Downpayment on Next House Hack?

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