HELOC with Hard Money, any experience?

Question

Hello,Considering using the equity in my primary residence to apply for a heloc. I am told most banks/credit unions will lend 85% LTV on primary.

With rates increasing, should having a variable rate with a heloc make this financing option less attractive?

Has anybody successfully or unsuccessfully used a heloc in conjunction with hard money?

Thanks!

Lucas Miles · Answer

@Chase Whiteman I wouldn't worry to much about rates increasing with the variable rate HELOC, if rates going up a bit makes/breaks your deal, then you need to find a better deal. The "BRRRR" method would be to, buy the property, rehab it, rent it out, then refinance it. Assuming your rehab improved the value enough that when you refinance you are able to pay back the HELOC that you took out. Your HELOC is then paid off, and you ideally have locked in long term fixed rate financing. Why do you need hard money and a HELOC? Say you buy property for 100k, bank gives you 75k to buy it, you will need to come up with 25k, so use your HELOC to fund the remaining 25k (and any rehab if you need to). Hard money is typically more expensive, especially compared to your HELOC.

Michael Porche · Answer

Hey Chase!!

What market are you investing in? Colorado Springs? I was actually just there giving a talk at a Real estate meet up group on STR investing with no money down strategies in some of the best markets. Did you get a chance to look at the data for colorado springs in where you are looking to buy if thats the case?

Chase Whiteman · Answer

@Lucas Miles thanks for the response. I do not necessarily need to use hard money I am more so curious if those two financing methods are commonly used together. I have some equity to play with but not a significant amount.

The market I am in is somewhat friendly to STR so I am considering the option of using the Heloc for a 10-15% down payment on a new Primary and turning my current single-family Primary house into a STR using some of the profits to make monthly Heloc payments. This is a touristy city so I am confident that the STR occupancy is there.

Chase Whiteman · Answer

@Alex Breshears thanks for the response Alex!

Yes, correct in terms of combining the two. I am also considering the possibility of just using the heloc against my primary as another down payment on a house hack, however at some point I would like more scalability which is why HM intrigues me. That is interesting about the 2 year lock out I'll have to take that into account. I have already reached out to a local Credit Union and will be sure to ask these questions.

For hard money I will take all that account if I decide to go that route. This is definitely helpful information.

Alex Breshears · Answer

So I am reading this as "using together" to mean you want to do a hard money loan and take out a HELOC on your primary at the same time? First, I would suggest doing the HELOC on the primary. Look for smaller local banks, they tend to have the best rates and terms. Also another consideration for the HELOC is when you can no longer withdraw the funds. Many lenders in my area for example are giving me 2 year lock out times. So I can only withdraw the funds for 2 years, and then it becomes essentially just a mortgage with whatever amount I have drawn down at that 2 year point. If that isn't a concern, then don't worry about it, but we wanted to recycle funds over and over, so having a long period in which to do that was crucial.

Now for the hard money side of things. True hard money is going to look at the asset more than the borrower. They are likely still going to underwrite you as a borrower to some degree, just to make sure you have the assets to close and finish the deal for example.  THey may or may not check your credit, and may or may not make you sign a personal guarantee on the loan if you are trying to buy the home within an LLC. Depending on how that hard money lender looks at things, they may not even care you have a HELOC.  Just one thing to take into consideration, one thing investors in general struggle with is so many inquiries on their credit report can reduce it, as can maxing out your HELOC all at once because it is considered a line of credit, not a mortgage. So keeping a high balance (low available balance) can also reduce your credit score.  So if the plan is to drawn down the HELOC immediately, you might want to make sure the hard money lender afterwards is not entirely credit score driven because you will likely see your score decrease.

Chase Whiteman · Answer

@James Carlson thanks for responding. I am familiar with the Co Springs regulations and have checked AirDNA to make sure I am 500ft from another non-owner occupied. Your podcast has definitely helped me understand some of the nuances with these STR laws.

Erin was my realtor for the property I am trying to get a heloc for, so if I decide to purchase another you two will be hearing from me.

Agree that it makes most sense to put your equity to use!

James Carlson · Answer

Just be aware if you're looking for an STR in Colorado Springs, the city's regulations are pretty restrictive. You can have a non-owner occupied Airbnb if zoned some kind of multi unit AND also 500' from another non-owner occupied short-term rental. The city doesn't actively enforce this, rather it relies on complaints, but still I don't like making investment choices based on hoping not to get caught.

That said, we do find properties in Colorado Springs that meet the above mentioned Airbnb rules. (Have five clients in the last year nab legal investment STRs.)

And HELOCs are great. Never combined it with hard money, but I'm all about recycling my equity. Whatever you decide, I wish you luck.

HELOC with Hard Money, any experience?

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