HELOC on our home to help fund our first deal?

13 Replies

My wife and I have been in the learning and research phase of investing and are wanting to take action. We shouldn't have any issues with bank lending but funding our first rehab will be tough. Unless, we pulled from the equity on our home. We refinanced last year so we would probably just be looking for a HELOC. My only concern is if we plan to sell any time soon (might rent it out instead), there would be little to no return if we pull all of our equity out now. Thanks in advance!

Hi @Tim Scroggins , welcome to the Biggerpockets forums!  There are several different approaches you could take here, and really the "right one" is going to come down to what aligns you and your wife with your goals, hopes, and aspirations.  The paths I could see as useful at this point would be (but not limited to):

  • - Sell your current home and purchase a home that performs excellently as an investment, and then add value to that one (getting your rehab muscle working AND simplifying the funding.
  • - Keep your current home and pull capital out of it through a HELOC. Factor those additional financing costs into the investments you purchase with the equity and find deals that will cashflow healthily even in light of the additional debt.
  • - Read B.Turner's book on doing deals with Low and (almost) No Money and implement some of these strategies to invest without tapping into the equity in your home.

Remember what Occam said . . . the simplest solution is usually be best.  Moreover, the simplest solution that aligns with your goals, visions, and aspirations IS the best!

A HELOC only makes sense if the numbers make sense. How much of the orange is left to squeeze after your recent refinance? A lot of people will say just go for it and leverage to make it, but that is bad advice for a first-time flipper. When you leverage one debt on top of another, on one property, you are putting your family and main house in jeopardy because your overage as a first-time flipper can be 25-40% on expectations. If you have 200k that you can HELOC and you only need a portion of it, then it may make more sense, but since you just did a refi I am thinking there isn't a ton of spread.

@Tim Scroggins - I'm not sure what you mean by "little to no return"? You will get a smaller check if you sell your house with less equity, but this is an opportunity cost analysis. If you don't take out the HELOC, that addtional equity is making you what % return (0%)? If you leverage it to buy a GOOD deal, then what is the return?

I used a HELOC to start investing in BRRRR deals. Each deal gets instant equity because they are good deals (adds directly to my net worth when I close) then that investment cash flows monthly, I get another long-term appreciating asset AND I refinance to pay the HELOC off and start again. The best way to calculate that is a basically an IRR calculation to compare that opportunity cost.

Hey guys, I am struggling to understanding a HELOC and/or home equity loan. Can anyone go into more detail? So if I did a home equity loan am I just leveraging my equity or is my equity actually getting pulled out of my home loan? For example, if I had a home worth 100k and had 30% equity in it and I needed a 30k down payment for a rental property. If I used a home equity loan would I now have 0k towards my original home? Or would I still have the 30% equity in my original home loan and I am just using that as leverage? Hope that makes sense.

@Steven Gebhardt - HELOC and Home Equity Loan both leverages your Equity. In your example... Yes you would have 0$ towards your original home after the Home Equity loan.

Home Equity Loan - Its an Amortization schedule where you know, you will paying the interests in the beginnings of your schedule. You pay your principal but you can take it out the principal.

HELOC - You pay the interest for the amount you have withdrawn. You can put back the principal at any time and you can withdraw at any as well ( during the draw period typically 10 years ) . I love HELOC if you know there is going to some cash flow and you want the flexibility of taking out and putting it back. I hope it helps.

@Ganessan P. - So in my above example, I could take out the 30k from my original loan and use that as a down payment through a HELOC? How much do most lenders require as a down payment when using a HELOC? And if I were to BRRR the investment property and refinance and gain forced appreciation, I could then use my investment properties gained equity to put back into my original home loan?

Short Answer is YES. First you need to find the lender who can provide HELOC on investment property ( i assume this is your investment property ). There are only few lenders who does that.. you google it and make the phone calls and find it. I would start with the local bank and local credit unions. It would take almost 20-45 days to get the HELOC.

HELOC is like your cash.. when the lender asks you how you are pay the down payment.. tell them from your HELOC. You may send the proof of your HELOC account and funds the available. Its your cash, you can do anything with that. Nobody cares about you on what you do with the cash from HELOC.

@Jonathan Greene - That is a fair point. We will definitely take that into consideration especially going into our first deal. I know the best way to learn is by doing it but I also understand there is a right way and a wrong way to get started. Thanks for the advise.

@Ryan Howell - This is similar to how we've been thinking about it. We only have about $31k available for a HELOC which would leave about $20k equity in our property. Which is spreading a little thin. But I will run the numbers and see where we stand on a possible return of going that route. Thanks!

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