Heloc for down payment?

Question

Hey BP I don’t need to do this, (currently at a savings rate of 2k per month) but I’m always looking into different strategies. Right now @30yr I have 2 rentals and moving towards the next. Plan is to invest into SFH and put 25% down through my own cash and savings (purchasing 95-130k homes)

I do have equity though in the two properties in total of around 175k. However like I said strategy is SFH in the beginning then ideally grow into multi family.

Is taking out a Heloc always a bad idea for long term or does it depend on the terms of the Heloc? Also what’s your two cents in what I should do here. Stay the course or look into switching things up? Long term goal is to earn 20k per month in cash flow by age 50 and ideally 10k by age 40.

Thanks in advance and hope to hear from you soon

Ian Hutton · Answer

Nice honestly this helps out a lot, I really like the idea of using my own money as the cheapest way to get in, then waiting for the right time to use the HELOC, because in my eyes the more time I wait to use it ideally the more my equity grows. Also if I purchase another property without the more can dedicate all cash flow into paying off the Heloc as well.

Also I feel like the quicker you pay it down/ have more accets before using the HELOC the better your debt to income ratio is.

@Seth McGathey

Jay Hurst · Answer

Lines of credit are great tools for short term use. so, when taking one out you want to understand your payback strategy. So, yes, usng short term leverage using your tapped equity can make a ton of sense. Just have to understand how you are going to pay it back.

Arman Ahmed · Answer

@Ian Hutton

Ian, it really depends on your goals and risk tolerance. A HELOC can be a useful tool if the terms are favorable, but it does leverage your current equity and increases exposure. Since you’re starting with single-family homes and moving into multi-family, staying the course and building disciplined savings keeps risk lower. I invest in the Midwest, and many investors I work with use HELOCs strategically for high-confidence deals while maintaining strong cashflow.

Seth McGathey · Answer

@Ian Hutton also, what I have done is I use my HELOC as my holding position currently for my properties capex holdings as well. That way I pay less in interest but still have those funds available if I have capex expenses. Once I eventually decide to close my HELOC or once the draw period is about to end, I will pull that money back out. But for now, might as well have it sitting in there saving me 6% of interest rather than sitting in a savings account making me 4%.

Ian Hutton · Answer

@Seth McGathey

Hey thanks for the speedy reply! I’m 30 years old, were there any unexpected terms you ran into with your Heloc like an adjustable rate for example? Also I suppose almost sounds like the quicker to pay off the better are there any penalties for that?

Lastly for my goals what would you suggest I do with my age and were I want to be? Better to simply save 25k in 1.5 years for next down payment or try to speed things along with a Heloc

Seth McGathey · Answer

That’s an awesome goal. How old are you now so we can judge how aggressively you should be investing? A HELOC can totally be used for a down payment (I am currently using mine to do this) but you just have to plan for how you will pay it off. Two main ways are 1. cashflow/save enough monthly to pay it down. 2. Do a BRRRR and use the cash back refi to pay off the loan. I am currently doing the first one, but if I could do it again I would plan for the second. It’s just too slow for me this way. I will pay it off in the 5 year period, but I really want to get my next property much sooner than that. And I still will, but it won’t be because of this deal it will be in spite of it. I am less than two years in and have already paid it down from $80,000 out of my HELOC to $55,000. And about 3 of those months I wasn’t cash flowing because I was doing fixes on one of the units. Best of luck!