First position HELOC + Rental property cashflow strategy

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First position HELOC + Rental property cashflow strategy

Rick Hart
Lake, MS · Member since 2019 · 9 posts · 14 votes
I have been brainstorming what I believe would serve as a dual strategy to play the rental property game the right way. Combining a 1st lien HELOC in lieu of having a mortgage. The advantages of a HELOC over a mortgage are not obvious at first glance. It's in the finer details where it shines. True, you can achieve basically the same amount of interest reduction and save many years of time to debt elimination through both the "send in extra payments" strategy and by having a 1st lien HELOC but having the equity available (considered seasoned) at any given time to jump on a distressed property as well as combining many advance strategies such as offsetting HELOC interest onto 0% CC's, using 401k loans, bonuses, inheritances, letting property taxes, insurance payments, savings, your checking account cash sit in the HELOC to work down its balance until any payment is due is very beneficial. The minimum amount due on the HELOC works itself down lower and lower as time passes unlike a mortgage where the payments are the same regardless if you make extra payments or not. This provides security knowing that you can always fall back on this minimum payment in hard times. In a mortgage, your money is trapped once it goes in and is expensive to take out. Has anyone actually practiced and combined the two methods above? I have two properties where one does not have a mortgage but only a 1st lien HELOC and it has been phenomenally effective. The other is a mortgage at a 3.625%, 30 year fixed. This should be a really good discussion!
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Kerry BairdPro Member
Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
5y

@Pierre Eade, Caeli Ridge of Ridge Lending Group offers the first position line of credit. Tell her I sent you.

@Bernadeau C., I have used TD Bank and PenFed for investment HELOCs.

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  • Rick Hart
    OP
    Lake, MS · Member since 2019 · 9 posts · 14 votes
    6y
    So what the idea would be is this...purchase a rental property and then funnel it's cash flow back into its 1st lien HELOC (no mortgage here) to quickly build up equity in it, reduce its monthly payment, and provide future funding for another rental property or continue with the rapid payoff schedule if you don't want to get over-extended. This would, I believe, provide a rock solid foundation of security and low risk (a steadily decreasing minimum payment and having access to your equity when you need it). Furthermore, a HELOC in 1st position would not likely be frozen in an economic downturn. The reason banks freeze HELOC's is because they are generally in the 2nd position behind a mortgage which makes them very vulnerable to plummeting home prices since the mortgage has first dibs on any sale of the foreclosure of the home and this leaves the HELOC lender SOL. The HELOC interest rate is generally higher than a mortgage in a good economy. In a bad economy I think I remember it's actually lower but not sure about that. I'm surprised in looking through the forums here that nobody has really dissected the HELOC the way I've seen it done elsewhere. There definitely are many advantages and a few disadvantages as well but very worthy of further discussion. It's curious to see that both a mortgage and the government run 401k's are designed to keep you from having access to your own equity/money. I can't help but think this is by design and at the detriment of the consumer...go figure. They just want to hep U.
    2Reply
  • Kevin Romines
    Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
    6y

    Yes, you are correct, 1st mortgage HELOC's can have huge advantages over a traditional mortgage, provided it is used in the correct way. What you should do, is quit banking with you normal bank, and start banking or making all your deposits and withdrawals through your HELOC. By doing this, and assuming you have more money left over at the end of each month, this will help reduce your balance much faster and yet you will still have available capacity to use, for when you see that hot deal that you need to jump on.

    If it used in that way, I can show a side by side comparison that will show that the HELOC will out perform any fixed rate product. The whole key, is that you have extra money going in, versus coming out. Meaning, you typically put money in savings each month, but now instead of putting it in savings, you leave it in the HELOC.

    If you can use the HELOC in this way, you will have a much better mortgage, actually you will have a tool that can be used for many years, all without having to re-qualify for a new mortgage every time you need some money.

    4Reply
  • Rick Hart
    OP
    Lake, MS · Member since 2019 · 9 posts · 14 votes
    6y

    "you will have a tool that can be used for many years, all without having to re-qualify for a new mortgage every time you need some money".

    After all, equity is your money. Why should banks get to leverage it when you should be. In a mortgage its trapped and can only be accessed at a significant cost...forget that. As long as a person uses their equity to put money into their pocket and not take money out of their pocket, you can build equity and wealth. I really believe that the HELOC is the other bookend along with buying cash flow rental properties that will give people a fighting chance at building real wealth. Without the HELOC equity building strategy, you are doing OK but still have a sizable leak in your bucket of water and the banks are there to catch every drop.

    0Reply
  • Rick Hart
    OP
    Lake, MS · Member since 2019 · 9 posts · 14 votes
    6y
    Your HELOC serves as a holding tank for any future purchases while it saves you significant interest in the process (a return in reverse). I realize that you want to have as little out of pocket as possible when purchasing properties (to minimize your risk) but at the same time if the markets ever turn south you won't be over leveraged (or am I seeing this thing clearly). I've just started this game of REI so any advice would be appreciated. Something tells me I just might be missing a piece of the puzzle here.
    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    6y

    There are just a couple of providers who offer a first position HELOC. I haven't used it yet, but do intend to implement this for my next purchase.

    1Reply
  • Marcello Di Gerlando
    Investor · Colorado Springs, CO · Member since 2011 · 322 posts · 238 votes
    6y

    @Andrew Postell

    Andrew what are your thoughts on this thread?

    0Reply
  • Rick Hart
    OP
    Lake, MS · Member since 2019 · 9 posts · 14 votes
    6y

    I'LL BET NOBODY WILL READ THIS THAT WON'T GO AWAY CHANGED BECAUSE OF IT!!!

    Take a scenario in which we completely go though a real estate market cycle...you know, the ups and downs. You've got a number of rental properties financed as first lien HELOC's (no mortgage). In a booming economy you have properties cash flowing positive. You take all of the tenants payment (which consists of PITI + your cash flow) for any particular property with a HELOC and turn it against the balance of what is owed on the HELOC (pay the taxes & insurance out of the HELOC via auto pay at the appropriate times...completely automated).

    What has just happened? First of all you have reduced *your monthly HELOC payment due*. Let me say that again, you have reduced your minimum payment due on the HELOC (and will continue to reduce it more and more over time). This increases your cash flow on that property and we know the only smart things to do is either keep putting your tenants check into the HELOC (to save tens of thousands on interest charges) or to acquire still other properties.

    Now along comes the recession in the market and you have all the flexibility and security in the world to weather the storm. Lets count how many options you have...

    1. The least amount you have to come up with to not lose your property is an interest only payment (can't do that with a mortgage and you might not be able to do a cash out refi in a down market on that mortgage either).

    2. You have prepaid principal by the amount of your cash flow. You now have forced equity built up in your property and have probably saved yourself tens of thousands of dollars in interest cost compared to a 30 year amortized mortgage.This is a fact because I have seen it and done it!

    3. Not only do you have the option for an interest only payment, that interest only payment has automatically decreased over time as well (your cash flow reduces your principal balance which reduces your interest payment) HELOC's recast themselves every single day.

    4. If needs be, you can actually take the payment due on the HELOC, out of the HELOC and make a minimum payment back to the HELOC and satisfy that requirement (not recommended for obvious reasons). Pretty clever huh? Your objective though is to always pay MORE than the minimum. You want to work down that balance! I only mention it as a absolute last resort.

    Over time you will significantly reduce the term of your debt by the amount of your cash flow going toward principal. Typically turning a 30 year term into a 5 to 10 year debt. At payoff your cash flow has maxed out and you have increased your velocity of wealth creation. But wait! there's more. LOL. Your property has also been appreciating as well as rents. You have also taken advantage of the tax laws to pay nothing in taxes.

    I really don't see much risk working this strategy along with BRRRR to accelerate your path to wealth.

    2Reply
  • Rick Hart
    OP
    Lake, MS · Member since 2019 · 9 posts · 14 votes
    6y

    Do you not see the possibilities of lines of credit? Imagine in 2006 and you were in lines rather than loans. Then in 2009 the housing bubble burst, real estate prices took a dive, rents came down and your cash flow suddenly disappeared and you owned a once $800K property that is now worth $550K. But you were smarter than "the crowd" and quickly paid down debt on your LOC to $550K, still had positive cash flow despite having to lower your rents because unlike the guy with a mortgage, you had options, a competitive advantage in the market because you could always just press the pause button by making the interest only payment until the storm passed. I'll bet if people did this back before the crash of 09, you would have cut in half the foreclosure rates across the country and that's being very conservative.

    1Reply
  • Pierre Eade
    Member since 2020 · 18 posts · 5 votes
    6y

    Hey BP People...love the conversation. I am a big fan of using HELOCs to purchase investment properties. I have done this multiple times. I have always had HELOCs as 2nd lien positions behind a traditional 30 year mortgage. Now I would like to have a 1st lien position HELOC instead. Do any of you have banks that offer this now on an investment property?

    0Reply
  • Bernadeau C.Pro Member
    Rental Property Investor · Orlando, FL · Member since 2014 · 540 posts · 230 votes
    5y

    for the folks who have had a HELOC before or currently does. what bank did you use for the HELOC? and do you know if that particular bank does HELOCS on investment properties?

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    5y

    @Pierre Eade, Caeli Ridge of Ridge Lending Group offers the first position line of credit. Tell her I sent you.

    @Bernadeau C., I have used TD Bank and PenFed for investment HELOCs.

    4Reply
  • Angela Pantaleone
    Member since 2023 · 2 posts · 0 votes
    3y
    Quote from @Kevin Romines:

    Yes, you are correct, 1st mortgage HELOC's can have huge advantages over a traditional mortgage, provided it is used in the correct way. What you should do, is quit banking with you normal bank, and start banking or making all your deposits and withdrawals through your HELOC. By doing this, and assuming you have more money left over at the end of each month, this will help reduce your balance much faster and yet you will still have available capacity to use, for when you see that hot deal that you need to jump on.

    If it used in that way, I can show a side by side comparison that will show that the HELOC will out perform any fixed rate product. The whole key, is that you have extra money going in, versus coming out. Meaning, you typically put money in savings each month, but now instead of putting it in savings, you leave it in the HELOC.

    If you can use the HELOC in this way, you will have a much better mortgage, actually you will have a tool that can be used for many years, all without having to re-qualify for a new mortgage every time you need some money.

    Do you know where you can get an all in one first position heloc in business name? 

    0Reply
  • Angela Pantaleone
    Member since 2023 · 2 posts · 0 votes
    3y

    Do you know where you can get a first position all in one heloc in a business name? 

    0Reply
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