Using HELOC for next investment - what am I missing?

Beaverton, Oregon
Private Lending & Conventional Mortgage Advice
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Using HELOC for next investment - what am I missing?

Tom Dieringer
Investor · OR · Member since 2020 · 61 posts · 32 votes

I'm six rental properties into my investment portfolio and have HELOCs on two of those properties as well as my primary home. However I haven't used them yet other than briefly on a flip two years ago.

I'm embarrassed to ask this question but the hell with it, I'm pocketing my stupid ego. I read about people who purchase a property, obtained some equity, and used the HELOC on that property to buy their next. But what I never hear anyone discuss is how the payments
on the HELOC, whether interest only or principal and interest,  factor the overall cashflow and return? Everyone seems to talk about including the costs of the new mortgage, taxes, insurance, maintenance & capital reserves, and the vacancy projections when looking at realistic cashflow, which we already do for all the properties in our rental portfolio.

But we, like many, cant find properties that are making any cashflow sense right now. Possibly we could invest for appreciation only if it's close to breakeven with not too much negative cash flow and the upside appreciation is very promising. But when I add in the cost of paying on the HELOC as well, it gets even farther from penciling.

Am I missing some aspect of creative financing?   I'm up for being aggressive but not stupid.

Thanks for any thoughts.

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Patrick Roberts
Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
2y
Quote from @Tom Dieringer:

I'm six rental properties into my investment portfolio and have HELOCs on two of those properties as well as my primary home. However I haven't used them yet other than briefly on a flip two years ago.

I'm embarrassed to ask this question but the hell with it, I'm pocketing my stupid ego. I read about people who purchase a property, obtained some equity, and used the HELOC on that property to buy their next. But what I never hear anyone discuss is how the payments
on the HELOC, whether interest only or principal and interest,  factor the overall cashflow and return? Everyone seems to talk about including the costs of the new mortgage, taxes, insurance, maintenance & capital reserves, and the vacancy projections when looking at realistic cashflow, which we already do for all the properties in our rental portfolio.

But we, like many, cant find properties that are making any cashflow sense right now. Possibly we could invest for appreciation only if it's close to breakeven with not too much negative cash flow and the upside appreciation is very promising. But when I add in the cost of paying on the HELOC as well, it gets even farther from penciling.

Am I missing some aspect of creative financing?   I'm up for being aggressive but not stupid.

Thanks for any thoughts.


 The general idea is to use Helocs to replicate hard money. They're revolvers - they're meant to be drawn and paid down relatively quickly to meet liquidity needs - such as making a cash acquisition or funding a rehab. You wouldn't use hard money for long term financing, and you shouldn't use a Heloc for this either. The basic idea is use the heloc to acquire and rehab the new property, then cash-out refi the new property to pay down the heloc. If the deal doesn't pencil like this, then you're taking on a heavy layer of additional risk by using the heloc for permanent financing - you basically don't have an exit. 

And you're absolutely right that most deals don't pencil out right now. Finding good yields is tough in this environment. 

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  • Chris John
    Member since 2020 · 671 posts · 937 votes
    2y

    @Tom Dieringer

    I've not used HELOCs, so it's possible that my answer won't correlate, but we've refinanced properties and used cash out to fund new purchases.  When we did it, rates and prices were low enough (and rents were high enough) to still be in a cash flow positive position despite the higher mortgages.  That's dried up for us with the higher rates (and I suspect similar for the same strategy using HELOCs). 

    Best wishes

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    2y

    @Tom Dieringer you have to consider the cost of the HELOC payments when evaluating the prospective investment. If you dont include them you are just fooling yourself.

         "Possibly we could invest for appreciation only if it's close to breakeven with not too much negative cash flow and the upside appreciation is very promising"

    That works until it doesn't. That is a high risk investment. We have had an extended period of above average returns for real estate. That won't continue forever. 

          "Am I missing some aspect of creative financing?"

    No but lots of other people are. They are missing the fact they are taking risks. Many are taking risks they probably don't understand if they haven't been through a downturn. 

    If you can't find deals that meet your criteria, your criteria is telling you not to buy. 

    PS: I am not saying you shoudl never use a HELOC to invest. Just understand the risks and benefits if you do.

    3Reply
  • Tom Dieringer
    OP
    Investor · OR · Member since 2020 · 61 posts · 32 votes
    2y
    Quote from @Ned Carey:

    @Tom Dieringer you have to consider the cost of the HELOC payments when evaluating the prospective investment. If you dont include them you are just fooling yourself.

         "Possibly we could invest for appreciation only if it's close to breakeven with not too much negative cash flow and the upside appreciation is very promising"

    That works until it doesn't. That is a high risk investment. We have had an extended period of above average returns for real estate. That won't continue forever. 

          "Am I missing some aspect of creative financing?"

    No but lots of other people are. They are missing the fact they are taking risks. Many are taking risks they probably don't understand if they haven't been through a downturn. 

    If you can't find deals that meet your criteria, your criteria is telling you not to buy. 

    PS: I am not saying you shoudl never use a HELOC to invest. Just understand the risks and benefits if you do.


     Great comment and thoughts Ned.  Thanks so much for chiming in.  Good to know I'm not crazy or missing something 

    0Reply
  • Patrick Roberts
    Lender · Charleston, SC · Member since 2019 · 1k+ posts · 1k+ votes
    2y
    Quote from @Tom Dieringer:

    I'm six rental properties into my investment portfolio and have HELOCs on two of those properties as well as my primary home. However I haven't used them yet other than briefly on a flip two years ago.

    I'm embarrassed to ask this question but the hell with it, I'm pocketing my stupid ego. I read about people who purchase a property, obtained some equity, and used the HELOC on that property to buy their next. But what I never hear anyone discuss is how the payments
    on the HELOC, whether interest only or principal and interest,  factor the overall cashflow and return? Everyone seems to talk about including the costs of the new mortgage, taxes, insurance, maintenance & capital reserves, and the vacancy projections when looking at realistic cashflow, which we already do for all the properties in our rental portfolio.

    But we, like many, cant find properties that are making any cashflow sense right now. Possibly we could invest for appreciation only if it's close to breakeven with not too much negative cash flow and the upside appreciation is very promising. But when I add in the cost of paying on the HELOC as well, it gets even farther from penciling.

    Am I missing some aspect of creative financing?   I'm up for being aggressive but not stupid.

    Thanks for any thoughts.


     The general idea is to use Helocs to replicate hard money. They're revolvers - they're meant to be drawn and paid down relatively quickly to meet liquidity needs - such as making a cash acquisition or funding a rehab. You wouldn't use hard money for long term financing, and you shouldn't use a Heloc for this either. The basic idea is use the heloc to acquire and rehab the new property, then cash-out refi the new property to pay down the heloc. If the deal doesn't pencil like this, then you're taking on a heavy layer of additional risk by using the heloc for permanent financing - you basically don't have an exit. 

    And you're absolutely right that most deals don't pencil out right now. Finding good yields is tough in this environment. 

    4Reply
  • Tom Dieringer
    OP
    Investor · OR · Member since 2020 · 61 posts · 32 votes
    2y
    Quote from @Patrick Roberts:

     The general idea is to use Helocs to replicate hard money. They're revolvers - they're meant to be drawn and paid down relatively quickly to meet liquidity needs - such as making a cash acquisition or funding a rehab. You wouldn't use hard money for long term financing, and you shouldn't use a Heloc for this either. The basic idea is use the heloc to acquire and rehab the new property, then cash-out refi the new property to pay down the heloc. If the deal doesn't pencil like this, then you're taking on a heavy layer of additional risk by using the heloc for permanent financing - you basically don't have an exit. 

    And you're absolutely right that most deals don't pencil out right now. Finding good yields is tough in this environment. 

    Thanks much Patrick!
    1Reply
  • Jacob Sherman
    12 Penns Trail Suite 138 Newtown, PA 18940 · Member since 2023 · 1k+ posts · 319 votes
    2y

    I always suggest to do the math backwards . see what the rents are and how much of a spread youd prefer to make over the mortgage payment and offer accordingly .

    2Reply
  • Ko KashiwagiPro Member
    Lender · Los Angeles, CA · Member since 2022 · 967 posts · 445 votes
    2y

    Hi Tom,

    Usually investors use HELOCs for short term financing purposes like flips and BRRRRs. This is because HELOCs tend to have higher interest rates and shorter terms. You could possibly pencil out the math if you use HELOCs to purchase STR, but it's uncommon an investor uses it for a LTR.

    310-848-9776
    1Reply
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