HELOC on a free and clear property?

Question

I recently bought 3 properties at auction, and have started the rehab process.  All 3 will be a flip strategy.  I also have a opportunity to purchase a buy and hold property that will net a 21.5% cap rate.  My strategy going forward is to focus 75% of my time and resources on flipping, and picking up a buy and hold rental as I go along ( the other 25%) for passive monthly income in between the big payments from the flips.

My question is this:  does it make sense for me to get a HELOC on one or more of the owned properties (soon to be flipped) to pay for this buy and hold?  I just spent a ton of my own money on these flips, and want to be conservative on spending until they sell.  A HELOC would be like a "cash advance" that would allow me to get this rental.

Is my logic flawed?  is this even feasible?

Thanks in advance for your valued advice.

Joe Villeneuve · Answer

@Joe Hughes Let me get this straight.  You put all cash in on these deals right?  So for lending purposes, you have 100% equity.  Also, you want to flip with the idea of buying hold properties for passive income to add to the lump sums from the flips.

Here is a thought.  First, flipping requires a buyer, and the time it takes to find, negotiate, close, then if they don't qualify or don't close...start all over again.

You are already prepared to leverage your properties using a HELOC.  A heloc has a short shelf life.  Helocs should be used to access untapped equity in an already leveraged property.  I'm a huge fan of this, and other forms of, "cash like substances".

However, in this case, I would suggest you just refinance.  I would also think about refinancing some of those flips you were talking about doing.  That way you can have the benefit of both access to flip profit (cash out refi) and holding cash flow, all with only one house...and you aren't relying on a buyer to come though.

Marcus Auerbach · Answer

@Joe Hughes depends on the timeframe. How long will you need to turn them arround? I try to complete a house within 5-8 weeks depending on the size of the project. I found a good rule of thumb is that I usually cannot spend more than 5k a week. Sounds funny, but a 25k rehab takes about 5 weeks. So for a couple months it probably does not make much sense to get a HELOC or the commercial equivalent CELOC.