cincinnati, OH · Member since 2019 · 12 posts · 1 vote
I am looking to buy my first rental property (SFR). I have a substantial amount of equity in my primary residence, which would allow me to get a HELOC and thus, cash, to start investing. Are there any cons to this route other than losing my house if things go south? Or even pros I might not be considering?
I would like to use cash initially for purchase and then take out a conventional mortgage once the property is fixed up so I can keep my residence and investments separate. Does this help lower the risk? I am concerned about qualifying for another mortgage since my regular job is not high paying. I do have a good sized emergency fund that should carry me through most issues and vacancies, but I would be mostly relying on rent payments to pay off the mortgage. What do banks look at to determine how much they will loan to you? Is it different on an investment property than a personal residence?
It’s a great idea as long as you know the risks, which looks like you have already touched on already.
That said, having a HELOC is great idea so you have access to your equity quickly. You can, like you already touched on, use the line of equity to pay cash for a property (depends, of course, on the HELOC amount you have), then refinance using delayed financing to payoff the HELOC or use the HELOC to put down a larger down payment if financing the investment property. There was also an article here on BP @Andrew Postell about you creating an LLC, then use HELOC to lend to your own LLC to purchase and renovate, have the LLC be the mortgage holder on the property, record the lien at the courthouse, then refinance to payoff the LLC, etc. Creative idea or you could just do the delayed financing. With delayed financing just list your renovation on the Settlement Statement/HUD-1 when you purchase as a cash out.
You are asking all the right questions.. As far as the HELOC, there are pros and cons. Your plan to use cash initially, fix it up, and take the money back out is a strategy people call "BRRRR" (Buy, Renovate, Rent, Refinance, Repeat). My first suggestion would be to talk to a few lenders, and see if you will qualify for a cash out refinance after the project is completed. This way you will know beforehand whether or not you will be approved for a conventional loan on an investment property. Going this route is less risky than if you were just using the cash as a down payment.
There is risk in any investment, and the worst case scenario is always losing your house. But if you are proactive, and do your research, you will be ok. You already have reserves and emergency funds, a lot of people forget this crucial step.
And we all rely on rent to cover the mortgage, that's what makes investing in RE so cool. Our tenants pay it. Screen well and make sure your property has cash flow.
And last, the bank looks at investment properties differently. It is less risk to them if it is owner occupied.
It’s a great idea as long as you know the risks, which looks like you have already touched on already.
That said, having a HELOC is great idea so you have access to your equity quickly. You can, like you already touched on, use the line of equity to pay cash for a property (depends, of course, on the HELOC amount you have), then refinance using delayed financing to payoff the HELOC or use the HELOC to put down a larger down payment if financing the investment property. There was also an article here on BP @Andrew Postell about you creating an LLC, then use HELOC to lend to your own LLC to purchase and renovate, have the LLC be the mortgage holder on the property, record the lien at the courthouse, then refinance to payoff the LLC, etc. Creative idea or you could just do the delayed financing. With delayed financing just list your renovation on the Settlement Statement/HUD-1 when you purchase as a cash out.
I'm a little confused about the logic of using HELOC. Why would you cash purchase using HELOC? isn't HELOC interest rate always higher than a conventional 30-year loan?
Let say you have $200k in HELOC and you have $200k cash.
In what circumstances would you use HELOC instead of your saving for the deal?
I use HELOC only to fund items that I expect to be short in duration because of the variable rate. 30 year fixed rate loans let me sleep well even though I have never had a loan for more than 10 years.
So if you believe the BRRRR will let you pay off the HELOC loan then it is a good option. If in doubt on being able to pay the HELOC off soon, I would do a refinance using a 30 year fixed on the primary residence to pull money out and use that money.
I am leery of variable rate loans when we are at such historically low interest levels.
Good luck
@Daniel Han I am looking to buy at a sheriffs auction, so it has to be cash. That is why I would use the heloc, then use the mortgage to pay it off. The lower interest rate would be a plus I wasn’t even thinking about. Bonus!