What would you do? 1.5% rate difference on HELOC

Question

Good morning everyone!

Long story short I'm finally taking the jump into scaling more rapidly. I currently have 2 duplexes, but in the process of taking out a heloc on my primary residence.  The current goal with this is, pull the equity and put it towards down payment for purchasing a total of 6 more units (whether that's 3 duplexes, 1 quad and 1 duplex, etc.). Appraisal is done and came back lower than expected at $286,000, the terms of the heloc are 7.5% up to 80% ltv or 9% up to 100%, 10 year draw 20 year repayment but the intention would be to pay off the heloc as quickly as possible so that realistically isn't even part of the consideration between under 80% or over.

The dilemma that I'm running in to is sticking to the lower rate allows me to pull a tad over $62k vs up to 100% would allow me to pull a max of $116k roughly. Do I take the higher amount and rate in order to scale quicker or do I limit it to the lower amount and lower rate? I know opinions are going to differ, I just feel stuck between the two decisions and some outside insight from those that have already utilized a heloc for the came thing would be helpful. Thank you!!

Jonathan Greene · Answer

Why are you focused on scaling when the only way you can scale is to take a second loan on your primary and burn all of your equity that you may need for something else (even if you are a high earner)?

Most people who talk about scaling now, when they only have a couple of properties, are watching too much content and not making enough contacts. What's the rush?

Any time you take a HELOC, you should only use 50 percent of what is available to you so you don't end up in a shortfall.

Nicholas L. · Answer

@Hali Snyder

I know this wasn't your question, but if you use HELOC money for a down payment + some other type of loan for the rest, you're probably just going to lose money, as the rental income won't be able to service all of that debt.

You mentioned "paying off the HELOC as quickly as possible" ... what kind of timeframe are you thinking about?  The rental income likely won't be able to do that, you'll need cash from somewhere else.

Hope that helps you think through this

V.G Jason · Answer

Fast solutions always have slow problems.

I get it, you want to leave your industry that you're in but this impulsive act of getting highly over levered to be in position to leave the job will make you need it more.

Really think this through.

Patrick Roberts · Answer

1.5% difference in rate on 100k is largely immaterial in the face of what youre describing. I would get the Heloc, but use it as a reserve source of liquidity. I agree with the others, overleveraging like youre describing is unlikely to pan out in this market. If you're able to put 7k+/month toward paying down the heloc, then just save that money for a downpayment instead. It sounds like you would be able to save enough for a downpayment on a new property each year.

Nicholas L. · Answer

@Hali Snyder

if you'll indulge the question, are you buying these deals on the MLS?  i'm skeptical that, at current rates and with HELOC debt, even temporary, they will cash flow at all.

again, just trying to help you think through this.

Hali Snyder · Answer

The timeframe of paying off the heloc as quickly as possible is of course really dependent on the amount that I pull. As of right now, the way the math boils down with conservative estimates based on current cash flow on the 2 duplexes and my income, $7-8k per month would be put back into paying off the heloc once the amount of units that I'd like to be at is hit. The first two are cash flowing about $1,550 total at the moment, which I realize isn't going to be the average for every deal. But slightly higher mortgages and more conservative estimates on rents still puts me in a position where I'm cash flowing on new ones while also factoring in the payment on the heloc, at least up to $80k.

I hesitated for the past year on taking out the heloc in general as I really had no desire to go further in debt to scale but the overall consensus that I've gotten any time I've mentioned slow grow vs biting the bullet and then paying it off in talks with local investors was that I was afraid of the debt for the wrong reasons?

Jonathan Greene · Answer

Scaling always involves not doing maintenance on the first properties for newer investors. When people get into that mode, they focus too much on acquisition and not enough on upkeep of existing properties. You talked about using the HELOC to buy six properties. Where is that going to happen and how much are you going to lose on management? Your gameplan is a best-case scenario and when you do that while you try to scale, you fail. Turn every data point into your worst-case scenario and you will stay safer. Whatever money they will give you on the HELOC, take only half.

Hali Snyder · Answer

The focus on scaling at the moment is solely being driven by the desire to leave the industry that I'm currently in within the next 3-5 years and wanting to have the groundwork done so that my focus after this can be something that I actually enjoy again that isn't as mentally taxing. Rather than bumping into an issue after making that jump where lack of time in the current job may be an issue, it seemed to make more sense to have this part tackled ahead of time rather than taking years longer to do the exact same thing, then just paying the heloc off and doubling down on paying off the properties entirely once the heloc is paid. Obtaining the properties wont be rushed to a point where they're not the "right" ones and not cash flowing even after factoring in payment on the heloc, but I'd like to have access to the funds needed if/when something pops up that's perfect rather than being in a position where I would in theory have it in a few weeks, months, etc.

In regards to the 50% of availability, are you referring to 50% of the total equity or 50% of the max on the heloc regardless of which amount it's taken out for?

What would you do? 1.5% rate difference on HELOC

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