HELOC for Investments - Good or Bad Idea?

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HELOC for Investments - Good or Bad Idea?

Jason Crow
Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes

My wife and I own a house and land worth about 1 million, free and clear. We are in a hot market in the Austin area. We have previously flipped homes and owned a few rentals prior to the housing crash. I decided to get my real estate license this past year so we could get back into it. When we got out of the industry, we invested in a new business that is still running and profitable. There is still a note on the business though. We have paid off pretty much all existing debt we have, sans the business. We want to get back into flipping and rentals, but want to avoid hard money or investment loans, if possible. I have spoken to a few lenders and financial advisors and HELOCs have come up. My idea is to take out a line of credit against our home, so we can purchase properties with cash, rehab, and resell. With the funds, would pay off the draws against the LOC and then set aside remaining cash so we can eventually build up a war chest big enough to not have to utilize the LOC. I am curious what the thoughts are on this approach. What are the pitfalls? Advantages/disadvantages? Has anyone utilized this strategy? Interest rates are low, I could avoid constant closing costs with investment loans over and over, and the cash would feasibly make my purchase offers more attractive. The other idea I had was possibly using the equity in my business (we owe about 650k, it's currently valued around 1.6-1.7 million). The business is land and a brick and mortar building. I think my dilemma might be that a small portion of the note (200K) was provided by the SBA, so they may have some sort of guidelines restricting us from borrowing against the business. Anyhow, feedback on if that is a better approach than utilizing my home.

In another thread, someone mentioned also doing a refi/cashout for long term holds which would pay off the draw as well. I am aware of the 4 loans issue. However, we previously ran our flipping business under an LLC and would very likely look at a portfolio lender should we decide to go that route. I am more just curious if that scenario is also plausible, as the OP never posted what came of his situation.

Thank you in advance for any advice or feedback you can provide.

Jason!

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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y

The nicest factor about a HELOC is you only pay on what you use and you only have to pay the interest not the principal. This keeps your carrying costs very low on flips.

You need to view the equity in your home based on it's true cash value.

1M is, if valued at a 10% return by investors, worth $100,000 per year in opportunity value. That is how much it is costing you each year having it lying dead in your home less what mortgage interest would cost. If you borrow through a HELOC at 4% you automatically should be gaining 6% as opposed to losing your present 6% return on your own money. Assuming you can invest it having the expected minimum 10% return.

To me using a HELOC is a no brainer that every investor should be taking advantage of with todays low interest rates.

Regrettably equity is where cash goes to die.

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  • Michael Lee
    Investor · Coppell, TX · Member since 2008 · 2k+ posts · 646 votes
    9y

    Hello and welcome to both of you on BP! That HELOC loan is looked at a last resort depending on its rates. My answer to that type of loan possible without having to pay any interest? If you going to use that I would stay on its terms, if at all possible, there might be Private loans available. I think that paying in cash is a benefit in times like these.

    Being able to pay the price quickly is an advantage today in this seller's market.  If you have ever read Robert Kyosaki's books. you have heard about good debt and bad debt.  Good debt is about having something that puts money in your pocket.  Use your reputation when you can.  Even owner financing is not out of the question.  Both Private including renovation on the property is a plus.

    Your past ecperience should help you. Private lenders and owner financing might be possible. Be as creative as much as you can when it comes down to lending. I have had no experience using a HELOC so that means advising on it is not based on my experience. I was born and raised in Dallas Texas.

    I found BP about 20 months ago while I was medically recovering.  My work habits were  so entrenched in me that I probably never found BP.  I have many things to think about while I recover and, hopefully, helping folks like yourself looking for answers on questions.  Just keep it simple for a while until you get some experience  today.

    Try to stay in control in those things you've are resposible for.  Track your income and expenses in report form and review them regularly with people you trust and understand know your goals.  Do not try to do everything you do into yourself and build systems and on the things you do and want to delegate. There are many other things about my life that I want to tell you but I will keep this letter short.

    Good luck to both of you!

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  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    Michael, Thank you for welcoming us! Actually, medical issues is why I am on here as well. I have had 4 knee reconstructions in just over 18 months, so have basically been unable to get around like I once could. Owner financing might be hard because my wife and I got really good at actually taking houses that were scheduled for tear down (usually by developers), and offering to move them so that the developer didn't have to pay to clear and dump the materials. Many times we can get the houses for free and just simply need cash to pay the house movers. I need access to cash because even though we have a lot of assets, we aren't particularly liquid. We would also prefer having the cash available to do necessary repairs and updates after the house is moved. The LOC has zero closing costs and we only pay interest on anything we borrow - similar to a credit card. The big difference being we would have to use our house to secure the line of credit. The idea is that we only need access to the funds during the time we are renovating/moving the homes which is usually 2-3 months. Then we immediately repay the money with the sell of the house. A good friend of mine got one recently and his rate was below 3%. Rates have gone up since then, but not substantially so I would suspect we could get in at 3-4% max. Most the investment loans I have looked at are 8%+ and hard money is 15%+. We would also have closing costs with all of those loan options :/ The other thing that I thought of is using one of our rental houses (it's completely paid for) to get the LOC too. Because it is an investment property, I am curious if the banks would extend a LOC and if the LTV is lower, rates higher? Thank you for the good advice. We are chomping at the bit, but you are right we need to make sure we take a practical approach to this.

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  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Jason Crow, will your INCOME and (25%?) SAVINGS allow you to borrow conventionally?

    If not, then the HELOC solution would seem to be a no-brainer.

    You have all that equity - currently WASTED! (Congrats on having it though - now USE it!)

    By the way, I believe you'll find that you can readily have 10 mortgages these days - not 4. (Have you been asking Lenders the right questions? Right now, don't even be concerned about 4).

    This same question comes up almost daily. It'll help to "Search BiggerPockets" (top right). 

    Welcome to BP. You've found a great resource to ask such questions. All the best...

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    The nicest factor about a HELOC is you only pay on what you use and you only have to pay the interest not the principal. This keeps your carrying costs very low on flips.

    You need to view the equity in your home based on it's true cash value.

    1M is, if valued at a 10% return by investors, worth $100,000 per year in opportunity value. That is how much it is costing you each year having it lying dead in your home less what mortgage interest would cost. If you borrow through a HELOC at 4% you automatically should be gaining 6% as opposed to losing your present 6% return on your own money. Assuming you can invest it having the expected minimum 10% return.

    To me using a HELOC is a no brainer that every investor should be taking advantage of with todays low interest rates.

    Regrettably equity is where cash goes to die.

    5Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    @Brent Coombs We are able to borrow conventionally, but it would be considered an investment loan because we wouldn't occupy it. Rates would be higher, plus downpayment. My hope is to avoid the downpayment, because that takes available cash reserves that we could be using for renovations or moving expenses. I am not as concerned with the 4/10 issue, because even if we went conventionally for the first couple, we would likely shift to a portfolio lender once we were up and running.

    I feel like I have largely decided the HELOC is the way to go based on money saved from closing costs and interest, but considering we have worked so hard to eliminate all debt on our house over the last 7 years it is scary turning around and taking money against it.

    Any idea if using our rental to secure a LOC is feasible?

    0Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    @Thomas S. Thank you for the break down. I guess I am mostly concerned because I haven't been able to find anyone that has actually done it. It sounds good on paper to me, and if it was just me I am in. However, I have one of those wife things that is a particularly hard sell, so I have to have my ducks in a row when I hatch up one of these plans :D

    Do you happen to know if banks will lend against an investment property (we own it free and clear as well)?

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Jason Crow, wow - a rental too! Sure, why not a LOC? Caveat: Interest Rate likely higher.

    I'm pleased that you think it's "scary", because that should ensure that you vet each deal well.

    Harder to find sweet no-brainer deals in a "hot" market. For cash flow, look elsewhere? 

    Lots to think about. Gather a team that you trust, including Contractor/s and Property Manager.

    Seriously consider just adding to your rental portfolio, rather than Flipping good real estate. My 2c.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    For the right investor and the right investments (solid flip deals), the HELICOPTER is a fantastic option. I have personally used a HELICOPTER from my personal residence multiple times so my comments do come from experience. You already pointed out most of the benefits, low interest rate, ease of pulling funds, POF available for all cash offers, interest only payments, no fees.

    The only downside in my opinion is if you take an investment loss, you need to still make the payments on that loss, thereby compounding the loss. That said, flip more with profits and pay that loss back quick and mitiflgate the risk by selecting solid deals.

    For long term holds, I do not think the HELICOPTER is the proper lending tool, go with conventional NOO loans. Though you have the down payments, that can be replenished by flip incone.

    Podcast Guest on Show #130
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  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    @Will Barnard Thank you for responding. You are the person I have been looking for. I haven't found anyone that has personally done this, or those that have simply don't talk about it. That in and of itself was part of my hesitation. If it was as good of a deal as it looks on paper, why aren't more folks talking about it, ya know? Our ultimate goal is to get enough flips done that we have the money to not borrow, but then I guess that's probably everyones goal. I have found some good rates on NOO loans, but then there are closing costs every time we do it, as well as putting most of our cash into the DP. So basically, if I am hearing you correctly, LOC is great to use (assuming I fully vet the flips), but avoid it for long term holds. Thank you for that direction!

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y

    That is correct, great for flips as the loan funds arevliquid and can go in and out without fees or points and since flips are short term, you can basically borrow at rates below 3% and use those same funds 2-4 times each year. As your profits build the war chest, use those for the downpayments on the buy and holds. Of course you will have fees and down payments upfront on each purchase, but so does everybody using leverage on buy and hold and the conventional mortgage on 1-4 family dwellings is tough to beat right now (well below average rates and you can get up to 10 right now before. After that, a portfolio loan encoumpassing the 10 properties could be done and then you could rinse and repeat again.

    Podcast Guest on Show #130
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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
    9y

    @Jason Crow

    I talked my significant other into getting a heloc against his house.  It was a hard sell.  He took out 200k to do private money lending.  He still has plenty of equity left (Los Angeles).  I would say make sure you know the deal backwards and forwards.  If it's a marginal deal pass on it.  I knew the rehabber very well, had done a few deals with him prior, and am on title-first position.  I let the numbers do the selling and Victoria's Secret to seal the deal.  So far everything has worked out.

    Good luck

    1Reply
  • John G.Pro Member
    Rental Property Investor · Brainerd, MN · Member since 2015 · 72 posts · 42 votes
    9y

     @Jason Crow I used my HELOC to buy a flip then the money I made to buy more rental properties. Best thing I ever did! BUT, you have to know what you are buying before leveraging your HELOC. What I mean is you will always have un-seen things that come up but that's all part of knowing what your buying and figuring numbers heavy so you can see your way through it, make some cash, and replenish your HELOC.

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  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    @Account Closed I am not sure Victoria's Secret has anything in my color, but that may be the key piece I have been missing ;)

    1Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    @John G. Will for sure have the numbers side of it. We have flipped several houses in the past. The problem is we leveraged all of that cash into our current business. Now that the housing market has rebounded, we want to get back into it.

    0Reply
  • Arlen Chou
    Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes
    9y

    @Jason Crow I am not flipping, but what I am doing is using the HELOC to look like a cash buyer in my crazy market. Last year was the first time I did it, but with the rate I found it made the plan a "no brainer"... prime - 1%. In my case my HELOC is first position on my primary, which is essentially the same position you would be in on a paid off home.

    I then let the property "season" and build up equity. I have been recently hunting for a "cash out" refi to put on the property and expect to get all of my initial HELOC money back out. I plan to use those funds to "re-charge" my HELOC and take my time looking at new deals. I like this strategy because it makes me look like a "cash buyer", so I can move fast in my market and I can take my time after COE to look for a good loan.

    Because I am a buy and hold investor, I am still getting loans and paying fees, but it is after the fact and all of the pressure is off.

    There is so much freedom in this strategy, I really don't know why somebody with a ton of equity would not follow this plan.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    9y

    @Jason Crow, why not use a HELOC (or LOC) for the down payment/s only, and conventionally borrow the rest (against Investment property being bought)? Of course it's normal for the Interest Rate to be higher for Investment borrowing - but, it's still historically low.

    You're in the perfect situation to continue with the BRRRR strategy - using JUST your current Rental as security (if you prefer). You need to find distressed properties/sellers to get sufficient discounts off their real value, but isn't that what you should be looking for anyway?

    I'm curious: how will your current Rental cash flow, once you leverage it at 75% its current value? Negatively? In which case, your future Buys using the BRRRR strategy need to be "different"!

    As you become more confident/successful, maybe borrowing will seem less "scary"? Cheers...

    0Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    After doing online research, getting tons of good advice from here, speaking with 3 mortgage brokers, 2 lenders, and 1 financial advisor, we have decided to move forward with the HELOC. We did find some good investment products that I was pleasantly surprised by, but in the end the LOC just made the most sense. I will keep everyone updated as to how things turn out. Thank you all very much for your input!

    1Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    9y

    Just wanted to provide some updates for informational purposes. 

    1. Couldn't find any banks in Texas that allow for HELOC on investment/rental property. That being said, we didn't really go down this path much as we wanted a bigger chunk of change than our rental would have provided anyhow.

    2. Our primary residence and land comps came back at about 1.5 mil. That isn't the appraisal that the bank requires, so we are expecting it to be slightly less than, but either way enough for our purpose.

    3. The reason I mentioned comps/appraisal is because we are looking at a 500k LOC. What is interesting to note about a LOC this high is the banks required we utilize a title company to close. The importance there is the reason the HELOC was as appealing as it was (besides the low interest rates) is because there are little to no closing costs. Well, LOCs over 125k here do not get that luxury. So, we will have to pay some closing costs, but it's only a one time deal during the term of the LOC, so still better than using mortgages over and over. Plus, there are no stipulations on how we use the money, so also better than a Home Equity Loan.

    4. We own 25 acres with this property. Those 25 acres are Ag Exempt. In Texas, a bill was passed approx. 10 years ago I believe, that makes it illegal for banks to offer LOC on Ag Exempt Property. Where does this leave us? Well, basically we have 2 options :

    Remove the Ag Exemption (Not gonna happen because we were grandfathered in and it takes 5 years to reclaim an exemption).

    Get a new survey done and section off the 1 acre the house is located on, as it doesn't get reported to the county as Ag Exempt anyhow. The issue is even though the county taxes you that way, it has to be officially done via survey for the bank to proceed. There are some other small items like if you are on well water the well has to be contained within 30 feet of the acre you subdivide as well as road access, but none of those were an issue in our case. Just something to be aware of for others. Going to cost us another $3500 or so due to the size of the property.

    5. Because of the above scenario, we also cannot count the remaining 24 acres for appraisal/LTV purposes. Our house and the acre was still enough to achieve our goal, but again something for people to be aware of because it did substantially cut the amount the bank will take as consideration.

    I will continue providing updates on our journey, but hopefully this information will be helpful to others looking at HELOCs to start their real estate investing future!

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  • Andres M.
    Rental Property Investor · Staten Island, NY · Member since 2017 · 76 posts · 13 votes
    9y

    Hi @Jason Crow. I'm very interested in investing with a HELOC as well and I'm curious to know how it has turned out for you so far. Thanks in advance.

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  • Matthew WatsonPro Member
    Rental Property Investor · Omaha, NE · Member since 2016 · 57 posts · 101 votes
    8y

    @Jason Crow I'm in the process of getting a HELOC set up as well for investment purposes. Any update on how this has worked for you so far?

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  • Matthew WatsonPro Member
    Rental Property Investor · Omaha, NE · Member since 2016 · 57 posts · 101 votes
    8y

    @Jason Crow

    0Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    8y

    @Andres M. and @Matthew Watson - First, my apologies Andres. I must have missed your inquiry. As far as how it has worked out so far, we are extremely happy we did it. While the process took far long than we had anticipated, and there were some hiccups along the way, all in all it has been fantastic. It opened up a nice source of unused income that we have been able to use to get a house to flip at foreclosure auction, some acreage to set up some rental houses on, and we are currently looking at finding some rental homes to move out to the acreage. 

    0Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    8y

    Just checking in again. I am happy to say HELOC has been a fast track to achieving our dreams. We were able to pay cash at foreclosure auction to get a steal of a deal and flipped it for a quick 70k. We have since purchased 4 other homes (1 with land, 3 that we moved) and an additional 25 acres that we are using as A combination of long term rentals and air bnb. We pay no loan fees to withdraw and deposit, the interest is only on what we have borrowed at the time, and is super low (1.4%). Having cash on hand for buying has become a huge advantage and I highly recommend this approach, if it's an option for you.

    2Reply
  • Matthew Phelps
    Flipper/Rehabber · Tyler, TX · Member since 2019 · 13 posts · 4 votes
    7y

    @Jason Crow

    Very awesome to see how your plan has been panning out. I am in the process of getting a HELOC on my home as well in hopes to obtain my first fix and flip. I will look to a forclosure auction as well. If you have any more updates I would love to hear them. Thanks!

    0Reply
  • Jason Crow
    OP
    Real Estate Agent · Dripping Springs, TX · Member since 2017 · 20 posts · 5 votes
    7y

    Best decision we ever made. We have flipped a bunch of properties and our Airbnb property is doing well. Once you have your Heloc, just make sure you remember to be very conservative with your flips and you will make money. Last thing you want is to lose your current assets risking it on future assets.

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