Purchasing second property with HELOC from my first property
My wife and I are looking to add a second property to our portfolio, we are looking to use the appreciated value of our first property to purchase the second.
I am just looking for some help understanding how to calculate cashflow while needing to incorporate the HELOC's variable interest rate. I don't want to get myself in a situation where I am losing money each month. Please reach out if you have purchased a property with a HELOC or have helped investors in this situation.
Thanks
Let's say you borrow 100K from your heloc and the current rate is 6%. Your payment is 100K x 6% = $6,000 a year or $493.15 a month (30 days). So now you know your payment!!!!
The advantage of the heloc is that you have quick access to funds, no bank fess, can pay it down anytime you want, there is no additional principal payments thus increasing your cash flow, and you get to write off that interest!
Even if your breaking even the Heloc buys you time to create value add if that is your strategy or come up with the capital to pay off the heloc and create the positive cash flow you're looking for in the first place.
@John McKee so in buying using the HELOC, one must buy the new house cash and not finance to make the scenario you provided viable, correct? I'm asking because the impression I have is that if you finance with money from the HELOC then you have two payments(one for the HELOC, and the other from the payments on the new house)
You can do either just mind your numbers. Worst case scenario is that you have your Heloc payment (downpayment money) and your new mortgage payment. Let's say the two loans wipe out your cash flow on the new property. Most people would not do this deal because it doesn't cash flow day 1. However if you know that you can pay down that heloc quickly because of money coming in over the next year does it really matter? Or maybe you have a value add situation where you improve the property by adding a room etc. and then get it appraised for more money then you bought it? ....The BRRR strategy. These strategies would delay your cash flow, but you're paying down equity on the new loan in the meantime, writing off interest, and more importantly you're in the game.
@Jeffrey Schechter, your HELOC rate will partially depend on your loan to value (LTV) and your credit score. I work with a HELOC lender who does for example 7.75% plus the margin. The margin will be determined by your LTV and your credit score. They have a better pricing program for over 740 but you can qualify for the loan with a 660 credit score and above.
The LTV starts at below 60% and then in 5% increments so 60% or less LTV will help get you a better rate than a 65-70% rate which will help get a better rate than a 70-75% and so on.
Some clients I work with are using fixed second rate mortgages since the rate is fixed and they don't have to worry about their HELOC rate going up. I'll send you a message as well.
@Jeffrey Schechter I'm currently doing the same with my first invesment. Heloc sourced my down payment and i'm financing the rest on a conventional mtg. As long as the numbers work go for it. In my case the home will still cashflow even with both payments and we can get the heloc paid off within a year. So it opens the doors to more cashflow.
I used comerica for my heloc which rate plus margin puts me around 7.5% for now on a 89.9% LTV.
Being conservative in your case I would open the heloc regardless and if the payments make sense on whatever rate you are provided then you should feel confident moving forward. Just make sure you pay down the heloc and not just the minimum payment since those are usually interest only before the loan amortizes.