Creative Financing Strategy - Am I missing sometihng?

Question

Trying to learn more about the HELOC strategy but might be missing something. Say I use a HELOC on primary residence to purchase a rental investment property all in cash so the equity is 100% in the investment property. I then say later I do a cash out refi to take cash out to pay off HELOC and then get a mortgage on the property. Is this possible or am I thinking about it wrong? Am I missing something? Or is it that easy? Thanks, Eric

David M. · Answer

@Eric Killian

Not sure what you are asking...  You can do "whatever you want" as long as you can qualify for the loans and afford the payments...

Not sure what sort of discount you are looking for?  On price, I hope not..  On the loan, not so much.  For a standard conventional investment loan you can't go below 80% ltv and I think at 75% you get the better rate.  After that it doesn't matter.

If you have sufficient rent to cover the mortgage and the hloc repayment is fine.  You are expecting that much rent to pay back the hloc within your timeframe?

Eric Killian · Answer

Can you use HELOC for down payment and then use rental income to pay that back to avoid variable interest? Also assuming I can buy a property at some type of discount to have a favorable LTV.

David M. · Answer

@Eric Killian

Yup, that's the idea..  You use the equity in your personal property like a "bank" via the hloc.  You draw on the hloc credit line to obtain cash to purchase a property.  If you are doing a brrr method and it works out "perfect," your refinance will let you pay off the hloc.  Now you are read to "repeat."

Just remember that even if you buy a property in cash, the Title needs to "season" for 6 months before you can get a conforming loan on the property.

As mentioned, run your numbers to make sure you achieve what you want.  Honestly, slightly negative cash flow isn't the end of the world...  But, it all depends on your investment strategy and goals.

Eric Killian · Answer

Great, thanks. Will have to look at the numbers very closely to make sure it will still cash flow nicely.

Jim Pellerin · Answer

That can work, assuming that there's enough appreciation in the investment property so that when you do your refinance at 75% LTV you can cover the HELOC. Also, be careful after you do a refinance,  that you dont create a negative cash flow on the investment property.