Best way to utilize 60k line of credit

9 Replies

Hi everybody,

I am new to the forum and very intrigued by the level of support most of the users seem to provide each other. I am hoping some of you savvy investors could provide some insight on the best way I could utilize a 60 k HELOC.

I am looking to get involved in the rental world and have been eying up a property that is listed at 59k. I (being a RE agent) showed the property to a client and immediately realized the potential with very minimal work, strictly cosmetics. When comparing all rental comps in the area, the property (3 br) should rent for 1000/month.

I have the available equity in my home where I could open up a line of credit for 60,000 with a rate of prime minus 1%. Would a smart investment strategy for the long run be to offer a cash deal, which I believe could get the property for 40,000, or use the line as a down payment of 20% to have more available for a second property.

I have been doing as much research as possible with reading books and following threads on here. I would really appreciate any advice you guys could provide to best utilize my available line of credit. If going the direction of opening a line of credit is crazy, please advise and I will look into other options. Thanks for reading and I appreciate any wisdom you could provide.

If you can buy properties for $40k (say $50k all in) that rent for $1000.

Then I would:

Buy as many as you can with 30 year mortgages.

Get a line of credit and buy all cash.

In fact, the best combo would be:

Get a line of credit.

Use the line of credit in portions as down payments on mortgages.

You will be limited to your monthly Debt Obligations / Income, and FNMA/FMAC loans have limits up to 10 I believe. YMMV

I am in a similar situation as Jake and I have similar questions. I've thought about using the strategy that Ben mentions, where you would use the home equity line of credit to pay the down payments on investment properties. The main question I have about this strategy is: what would you do with this new balance that is now placed on your line of credit? From what I can tell, most Equity lines are not fixed rates and are generally only for 10 years. This would make the monthly payments somewhat too high to carry. So, am I missing the rest of the strategy? Should you:

• Use the Equity Line of Credit to pay for down payments.
•Then once the rental properties are purchased, refinance these properties to pay off the balance of the Equity Line of Credit an repeat the process for additional properties?

Jake, I hope my questions add to your original question.

Thanks

@Sean S. , my Penfed line of credit is for 15 years.

If you use the line of credit as a down payment on another home, you can't just re-finance right away and cash out, (you just got a mortgage). You can wait until you own enough equity in the property to do a cash out refi, and pay off your original variable HELOC.

Or, you can do the strategy of HELOC as down payments, and then use your rental income to pay off your HELOC balance every month (and save the 3% or 4% interest charges).

Another advantage of HELOCs are that they are often interest only payments. But yes, given that they are often variable, as rates rise, so will this interest payment.

Thanks for the response Ben. I understand what you are saying. Have you used either strategy? (The use of your rental income to pay the line back monthly or refinance the rental property to pay back the line) If so, did it work out well for you?

How about the option to use the Line to buy the rental home cash instead of just using it for a down payment (as the first step)? Would it be better to do that so that you can refinance the rental home faster and you might actually be able to get a better deal since you would be buying the house cash? What do you think about that? Is it bad to put too many eggs in one basket?

Thanks again.

@Sean S. , yes, I have used a HELOC as a down payment on another home. Rates have been low enough that I am not paying down the HELOC and reinvesting funds.

Yes, if you buy cash from your HELOC you may get better deals.

But, most lenders look for a "seasoning" period of 6 months. Make the phone calls to your lenders to find out. In some cases you have to wait a year.

Got it. Thanks.

Thanks for your guys input and advice. At what point can you use the positive cash flow from a rental to get a new investment loan on another property. For example, lets say I max out my debt/income ratio off of the HELOC. Obviously I will need more monthly income to be approved for an investment loan. When would the positive cash flow be taken into account for a new loan?

another thought I had is based on your personal cash flow situation. Say you had a good jobs/saved a lot a year such as 20-40k per year then it would make more sense to go with the heloc. Consider it a bridge loan. Let me know if anyone disagrees.

Originally posted by @Jake Engle :
Thanks for your guys input and advice. At what point can you use the positive cash flow from a rental to get a new investment loan on another property. For example, lets say I max out my debt/income ratio off of the HELOC. Obviously I will need more monthly income to be approved for an investment loan. When would the positive cash flow be taken into account for a new loan?

For conventional lenders, two years of landlord experience required (showing rental income for two tax returns is the minimum). Portfolio lending will vary from lender to lender.

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