HELOC vs Construction Loan to finance rehab.

12 Replies

Hi everyone, I am fairly new to bigger pockets and most definitely a novice with REI. I have been so engrossed with this website and the wealth of knowledge that is freely shared. I happened to stumble across this site when searching for builders risk insurance and have been so addicted. What I didn't think was possible regarding REI is possible and even more...opportunities are not limited. It's a matter of knowing. I've read, and read, listened to a number of podcast and am affirmed each time.

In any case, I own a property free and clear with my aunt. This has been her only home and is in dire need of major renovations and I have decided to gut. Given its prime location and ability to make a 2 BR basement rental unit...this is a win win. I have met with contractors, architect and found a lender for construction loan. I was of the understanding that you could not take out a HELOC if it wasn't your primary residence. I went to the bank today for another transaction and posed the question after reading a number of post. I was informed that I could take out a HELOC and it not be my primary resident.

With the construction loan, funds are closely monitored and before a draw is released it must pass inspection and would protect me. I selected a general contractor and am very impressed with the jobs he has completed. He works with a local investor who flips properties in the DC area. My only concern with him is that he is slow to respond phone calls and I had to put my foot down. Would you advise I take out the HELOC or construction loan? I am aware that the construction loan would later be refinanced.

Thank you!

Just my take on it... I'd do a construction loan so that the general contractor doesn't bolt with your money because you have to submit draws. That protects you being new and keep money somewhat safe. HELOC all the money will be there for the taking of given the chance. Not saying they will but I don't like to give someone a chance to take advantage of me if I can prevent it. Also, if the house is in need of that many things, it won't pass an appraisal which a HELOC requires. I do not believe a HELOC always a subject to appraisal but I am not 100% sure on that.

what @Justin Thompson said.

Let me add, that after you are finished with your rehab, you can refinance which will not only pay off the construction loan, but since I'm pretty sure (assuming) that since you had 100% equity to start, the construction loan would add to the value of the house and you would then get all of (at least most) of your equity out as cash to use/start your investing with.

I would need to know all the numbers to be sure though

Thanks Joe. The tax value is 389K. In speaking with the loan officer indicated it would roughly appraise for 440-450K as is which is conconsist with offers that are received in the mail.  After renovation would be no less than 700K...likely more as I am giving you the lower #s of comps that were pulled for current market prices.  The rehab cost will be $255K.

Originally posted by @Mimi J. :

Thanks Joe. The tax value is 389K. In speaking with the loan officer indicated it would roughly appraise for 440-450K as is which is conconsist with offers that are received in the mail.  After renovation would be no less than 700K...likely more as I am giving you the lower #s of comps that were pulled for current market prices.  The rehab cost will be $255K.

Get the construction loan. Pay it off with a refi. you should be able to get better terms with a refi than a HELOC.

Example:
ARV = 700k
rehab = 255k
REFI  = 525k (75% of ARV...tryp)
Cash = 290k (after payoff of construction loan)...this is cash to move forward, and you have a rental left behind...providing it will still cash flow with the new loan in placde.

Thanks Joe 2 BR rentals avg 2000 to 2300. If I rented the main portion of the home...rent would be 3500. It's a matter of aunt bring willing to live in the basement apartment.  

i did a heloc and a refi at about the same time.  I like the heloc because as you pay back the heloc, the payments go down unlike the refi, the payments never change.  

Yooch

Originally posted by @Yoochul C. :

i did a heloc and a refi at about the same time.  I like the heloc because as you pay back the heloc, the payments go down unlike the refi, the payments never change.  

Yooch

 You add the heloc payment to her existing debt payment.  The refi takes out the existing debt, and the payment.  The terms for a refi are usually much better...as in lower payment since it is amortized over 30 years.  It's about cash flow.

Originally posted by @Joe Villeneuve :
Originally posted by @Yoochul C.:

i did a heloc and a refi at about the same time.  I like the heloc because as you pay back the heloc, the payments go down unlike the refi, the payments never change.  

Yooch

 You add the heloc payment to her existing debt payment.  The refi takes out the existing debt, and the payment.  The terms for a refi are usually much better...as in lower payment since it is amortized over 30 years.  It's about cash flow.

 Joe,

If one were to get a heloc and a refi at the same rate, the payments would be the same to start.  The amount of interest is the same.  However when you pay off a heloc and you pay down the principle, your monthly payment drops.  if you decide to pay only interest at the beginning, then you have more cash flow since you're not paying principle until the draw period is over.  Am I missing anything?

Thanks

Originally posted by @Yoochul C. :
Originally posted by @Joe Villeneuve:
Originally posted by @Yoochul C.:

i did a heloc and a refi at about the same time.  I like the heloc because as you pay back the heloc, the payments go down unlike the refi, the payments never change.  

Yooch

 You add the heloc payment to her existing debt payment.  The refi takes out the existing debt, and the payment.  The terms for a refi are usually much better...as in lower payment since it is amortized over 30 years.  It's about cash flow.

 Joe,

If one were to get a heloc and a refi at the same rate, the payments would be the same to start.  The amount of interest is the same.  However when you pay off a heloc and you pay down the principle, your monthly payment drops.  if you decide to pay only interest at the beginning, then you have more cash flow since you're not paying principle until the draw period is over.  Am I missing anything?

Thanks

 Did you get a quote on both the HELOC and the REFI for ?

1 - Amortization period

2 - Term (a refi is the length of the Amortization period, the Heloc may be amortized over 30 (rarely...usually 15), but the payoff may be sooner...as in a balloon in 7 years.

3 - Interest rate (compound or simple)

4 - fees

5 - and a big one...% of ARV they will loan you.

HELOCS and REFI's usually don't have the same terms.

Thanks for all of the valuable advice. I have moved forward with the construction loan. For my financial security and peace of mind, I agree this is the appropriate route to take. You guys have been great and as always I continue to learn more and more everyday about REI.

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