Rental Property Investor · Matthews NC · Member since 2021 · 11 posts · 5 votes
We have a good amount of equity in our primary home, is it a good idea to use a HELOC on that home to purchase our first and possible second investment property?
Hey @Brad Cherry, I disagree with Jason on this. I'd go HELOC. It gives you much greater flexibility, much lower closing costs, a low rate and doesn't make your mortgage payment increase on your primary residence (speaking from experience here). Additionally, I'd look into a 1st Lien Position HELOC that you use as your checking account also... I can give you more info on this, but this cash flow strategy has been a game-changer for me and my family.
I typically advise home owners to just do a cash out refinance rather than a HELOC. This ensures a few things when it comes to buying an investment property. You have the cash on hand usually in an interest bearing account to help offset interest. You have cash or liquid reserves if bank/lender needs to verify funds as liquid reserve not coming from a debt obligation like a HELOC. You also have full funds in your account readily available where a HELOC is an open end line of credit that can be reduced or closed if anything happens to your credit scores or payments.
A lot of investors run into issues along the way and even if you have perfect credit and excellent pay history it takes just (1) one hiccup and the credit bureaus can trigger a warning to the bank/lender who holds the HELOC to reduce or close the LOC at any time with no warning.
Hey @Brad Cherry, I disagree with Jason on this. I'd go HELOC. It gives you much greater flexibility, much lower closing costs, a low rate and doesn't make your mortgage payment increase on your primary residence (speaking from experience here). Additionally, I'd look into a 1st Lien Position HELOC that you use as your checking account also... I can give you more info on this, but this cash flow strategy has been a game-changer for me and my family.
I'm interested in learning more about this method. My primary residence is paid off and i am weighing the options to leverage my equity towards my next deal.
Thank you for the message, I agree with you. I do not want to re structure our mortgage payment through a cash out refi. I was thinking we could use a HELOC kind of like a private money lender and draw from that instead of another source of private money. We have about 150,000 in equity in the house for a HELOC. That is after the 80% calculation from the entire equity in our home. Would you suggest trying to get as much as we could on the HELOC instead of just applying for say 100,000 of it? Then we have more flexibility for future deals.
Absolutely @Brad Cherry, get the HELOC for as much as they'll give you. Doesn't mean you have to use it all, but if the equity is there, it is better to have access to the credit just in case a great opportunity comes your way.
@Joseph Firmin I'm also interested in your advice/info on a 1st lien position HELOC tied to the checking account! I have a free and clear home valued around $100K that I want to get a HELOC and start my first BRRRR. I'm hearing this could be the best strategy to access my equity.
@Joseph Firmin I recently posted something similar to this post and see you’re giving good responses here so if you don’t mind to just allow me to pick your brain for a second. What is the more intelligent financial move?
1) use your HELOC to fully purchase a rental for let's say 100k but it's listed at 150k (this is assuming sellers give better deals to fully cash buyers since no dealing with banks on their end). But, this 100k of let's say 175k credit line is now tied up in this rental you just bought which leaves you with 75k.
2) use your HELOC for a down payment of let's say 30k (20% on the 150k house) on the rental and get a separate loan for the rest of the rental, which ends up costing 50k more for the home long term but also leaves you with 145k left on your HELOC.
Contemplating my first rental purchase if my appraisal goes well and just wondering what most people do in this scenario.
@Ryan Stumbo, No need to tie up your equity long term. The idea is to use it to purchase and then immediately (literally the day after you close) go get a mortgage on the property, what many refer to as a "rate and term refinance." The process is also referred to as delayed finance. You essentially buy the property with cash to lock it up (preferably at a 25-30% discount), then you go to a lender and put a mortgage or 1st lien position HELOC on the property and the lender cuts you a check for the amount you paid for the house. You take that check and pay down the HELOC you took it out of in the first place, that way, the equity is still available for use going forward.
@Joseph Firmin that's what I thought. So HELOC on my primary. Use that to get a better deal with a cash offer. The day after it closes, use the same bank to get a first position HELOC on the new property. Which let's say it was listed for 130k, I get it for 90k, the HELOC will likely amount to that 90k easily, so take that 90k and pay off the HELOC with the bigger credit line to open it back up. Sound correct?
Now my question is, with the property I just bought, what if my strategy is to buy and hold? Do I just pay the HELOC down as quickly as I can and get it knocked out or am I going to pay less over time to just turn the property into a regular 15 or 30 year loan? What is my next step once I secure the 2nd HELOC if I want to hold?
Ryan, make sure you understand the difference between a 2nd lien position HELOC and a 1st (that you would use as a checking account - more of a cash flow strategy). Also, ensure you understand the LTV of the property you're purchasing. The lender will only lend you (usually) 70-80% of the value of the property. This is why you want to be able to buy it at a discount so you are not out of pocket any cash at the end. No need to get the mortgage or 1st lien position HELOC with the same bank you have your primary residence HELOC with. Always shop for the best deal and what works.
Regarding you second question, this all depends on your strategy. You get the property on the mortgage, then you pay it down as slow or fast as you want, using the rents from the property.
Couple things, make sure you really understand the difference between 1st and 2nd lien position HELOCS. Using a 1st lien position HELOC, this is a cash flow strategy.
You do not have to get the HELOC with the same lender you have your primary residence with - always shop for the product and lender that best suits your need.
Make sure you understand LTV. The lender will only lend you 70-80% of the value of the home. This is why you want to buy at a discount.
Regarding the second question - this all depends on your goals and strategy. You can pay it down as slow or fast as you want using the rents of the property.
@Joseph Firmin so if the bank will only lend you 70-80% of the value, how do you know the true value before you buy? If you pay cash doesn’t this bypass most of the bank stuff, or does the bank still come out and get an appraisal on the home for you? It seems as if an appraisal before ever buying would be absolutely necessary so you know not to overpay and ruin your equity right out of the gate.
Practice @Ryan Stumbo. If I was to give you homework from our interactions on this thread it would be to go analyze 100 houses using the BP calculator for your target market. Once you get to know the value of homes in your target market you will know the answer to your question above. Values of SFH are based on comparable sales of other SFH in the immediate area - that's how appraisers value your home. When making an investment, you need to have a very good idea of a range of values for say a 3BR/2BA home in your target market. Knowing that, you can make offers 20-30% below the market value (not list price) for the house you are targeting. The way to get good at understanding VALUE in your market is practice... go run the deals.
I did exactly this in 2016 to buy our first rental property (a mobile home park). We combined cash, a HELOC, and a 401k loan to get the down payment plus operating capital.
Lessons learned:
HELOC
-Shop around for the HELOC. Not only do all banks have different rates and costs, but some even have the ability to fix the interest rate!
-One cool feature is that you only pay interest on the amount borrowed, and you can pay in and draw out whenever you like. So as you save up for your subsequent REI purchase, paying off the HELOC with your savings gives you a place to "invest" your savings that's still liquid. It gets you totally out of the "where should I keep my savings" debate.
-I've found that lenders get a bit worried if your liquidity is from AVAILABILITY in a HELOC. They don't seem to be worried though if you have CASH plus a HELOC balance. The 3 button clicks and 30 seconds it takes to transfer the funds from your HELOC to your business checking prior to sending proof of funds may save you a lot of explaining...
401k LOAN
-Watch out! If you lose your job you must repay in full within 60 days!!! I mitigated this by having enough comp and vacation time saved up at work to more than cover my loan balance in the event I had to leave my employer (these get cashed out if you leave for any reason).
-Pretty cool in that you pay interest to YOURSELF! The rate is lower than you'll likely get in an index fund, but more than bonds. I adjusted the asset allocation so that the loan offset the bond portion of my 401k portfolio to avoid opportunity cost on the equity portion.
Just make sure that whatever property you buy can cover ALL the loan service after expenses, and that there is cash flow left over.
@Brad Cherry this is exactly how my wife And I invested into our first 2 deals. We are currently in the middle of the rehab process for both of them. We have 2 helocs on two different properties because before we moved out of one house and turned it into a rental we opened up a heloc just to have it. They are interest only and have been super easy to draw from straight into our checking accounts. Rates at 3.75% and 4.15%. And to open them up there was no fees just needed equity in our homes. I advise anyone to do it this way.
@Brad Cherry to get back to the original post, yes you can use the HELOC as a down payment . Though I wouldn't advise it.
I'm using a HELOC that I put on an investment property. I love the HELOC option because I only make a payment when I'm using the HELOC and when it's fully paid off, I cash flow like crazy. The reason I wouldn't use my HELOC as he down payment is because then I would be 100% leveraged on an asset and my cash flow would be poor. Instead, I use the HELOC to fund a BRRRR strategy deal and I act as my own lender. Upon the refinance, I pay off the HELOC.
I went through the scenario several times, thinking "should I use the HELOC to get 5 SFH rentals right now, or should I BRRRR." Ultimately, after doing the math, the 5 SFH would have poor cash flow and would take a LONG TIME to pay off the HELOC. Whereas the BRRRR strategy keeps it pretty the time leveraged minimal.
If you will refi the property you are buying to payoff line of credit yes. If you have a long term needs then just cash out refi into these super low rates.
Hey @Brad Cherry, I disagree with Jason on this. I'd go HELOC. It gives you much greater flexibility, much lower closing costs, a low rate and doesn't make your mortgage payment increase on your primary residence (speaking from experience here). Additionally, I'd look into a 1st Lien Position HELOC that you use as your checking account also... I can give you more info on this, but this cash flow strategy has been a game-changer for me and my family.
If you're going to use a HELOC on your primary residence to fund an investment property (down payment and/or remodel), is it better to draw down what you think you'll need before making offers, or is it ok to wait to draw down the needed funds when you get nearer to closing?