Using home equity loan for downpayment on investment property

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Using home equity loan for downpayment on investment property

Jayme Mendal
Cambridge, MA 路 Member since 2014 路 5 posts 路 8 votes

Hi - I'm new to the site, and wanted to jump right in by posing a question for the community...

I would like to acquire a property, but am short $20-30K for the downpayment. That said, I have $300K+ equity in my primary residence. Is it possible to (and/or advisable to) draw a home equity loan against my primary to bridge the shortfall for the downpayment and help me acquire the property? Any alternatives or red flags I should be thinking about?

Any thoughts or suggestions on this would be much appreciated!

1Reply
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Brandon M.
Agent / Investor 路 Clearwater, FL 路 Member since 2014 路 573 posts 路 281 votes
12y

The one suggestion I would make: Don't tell the bank giving you the HELOC that you want to use it to acquire more property. Some banks aren't fans of that, so just tell them "property improvements" as the general reason.

When I got mine, the mortgage broker taking my application just said "I will pretend I didn't hear that" when I told her I wanted to use it to buy more real estate.

7Reply
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  • Bryan L.
    Residential Real Estate Agent 路 Cookeville, TN 路 Member since 2013 路 1k+ posts 路 948 votes
    12y

    Yes, it may be possible, but will depend on the specific rules/guidelines for the specific loan product(s) that you will be using. Risks: you will be putting your personal residence at risk.

    0Reply
  • Dave VisayaPro Member
    Moderator
    Audio Engineer and Investor 路 Cebu City, Cebu 路 Member since 2013 路 7k+ posts 路 881 votes
    12y

    Hey @Jayme Mendal welcome to BP! Definitely start jumping into the community here and don't be afraid to ask your real estate related questions in the forums.

    See you around!

    BiggerPockets
    0Reply
  • Travis Christl
    Real Estate Agent 路 Victoria, MN 路 Member since 2013 路 56 posts 路 29 votes
    12y
    I have deployed this strategy and used a heloc to finance my last 2 properties. It has worked well and would do again. Main concern is this further deteriorates your cash flow as now have 2 mortgage payments. It also comes with variable rate so when interest rates go up; your cash flow will go down. But the positive side is I own 2 townhomes each worth about 125k for zero out of pocket money and in 20 years will own them both free and clear. That is quarter million dollars generated before appreciation. Make sure you in good stable market because as you know now your home is at risk
    5Reply
  • Corey Patterson
    Investor 路 Litchfield Park, AZ 路 Member since 2014 路 10 posts 路 6 votes
    12y

    It's possible. I'm planning to use a heloc loan for my down payment on an investment property. The downside is that I'll have my house payment, heloc payment, and investment payment. But it is definitely doable.

    3Reply
  • Jayme Mendal
    OP
    Cambridge, MA 路 Member since 2014 路 5 posts 路 8 votes
    12y

    Thanks to all those who replied. Very helpful!

    0Reply
  • Andrew Bosworth
    Rental Property Investor 路 Harrisburg, PA 路 Member since 2013 路 161 posts 路 62 votes
    12y

    I made a recent all-cash offer with a HELOC (I was outbid), but am now considering using a HELOC for the down payment on a larger property.

    Has anyone here used a HELOC for the down payment, then secured a single mortgage for the entire amount (to repay the HELOC right away)? If so, would you recommend this approach?

    2Reply
  • Scott Nipp
    Investor 路 Fort Worth, TX 路 Member since 2014 路 107 posts 路 15 votes
    12y

    @Andrew Bosworth That sounds like a great strategy to me, but obviously you need to be sure that you can get enough on the mortgage to cover the HELOC repayment. I assume this shouldn't be too difficult so long as you are getting the property far enough below the appraised value to get the full mortgage. I really don't see any downside on this, but I'm new to the game and sure haven't done anything like this before.

    0Reply
  • Jayme Mendal
    OP
    Cambridge, MA 路 Member since 2014 路 5 posts 路 8 votes
    12y

    Andrew - For an investment property, you will likely only be able to get a mortgage for 75-80% of the appraised value for the property. So, if you make the downpayment with a HELOC, the expect to pay it down with a new mortgage, you will need to buy the property 20-25% below market value. Otherwise, you will not be able to get a mortgage large enough to pay back the HELOC.

    Here's the example:

    Say the property cost 100K. You put 25K down with a HELOC, and take a mortgage for 75K. Then, you want to put a new mortgage on the property for 100K to pay down the 25K HELOC. The only way you can get a mortgage on an investment property (from most lenders) for 100K, is if the value of the property is $125K or greater. So, unless you are able to buy the property at $25K (or 20%) below market value, you will not be able to get a mortgage large enough to pay down the HELOC.

    8Reply
  • Jeff S.
    Specialist 路 Portland, OR 路 Member since 2010 路 3k+ posts 路 1k+ votes
    12y

    Yes, I would say it is advisable to do this. If at the end of the day you end up with 2 paid off properties (assuming you do no more investing) you will be much better off. They say the family residence is most peoples largest asset. Why not double it?

    What are the risks: 1) Interest rates increase and your heloc increases, pretty much a given. 2) Values drop because rates increase. 3) You don't know what you are doing and end up with a deadbeat tenant that trashes your property.

    Really though the biggest risk is being afraid to take a risk and ending up with very little IMO.

    3Reply
  • Andrew Bosworth
    Rental Property Investor 路 Harrisburg, PA 路 Member since 2013 路 161 posts 路 62 votes
    12y

    Scott Nipp,

    Thanks for the feedback. I'm new at this too! I agree with your comments. The important thing to do when making an offer is to be able to back it up with numbers. If you can do this, it seems the lender is going to be much more inclined to provide the loan you are seeking. My goal in this deal is going to be to consolidate to a single mortgage (to pay the HELOC back asap).

    Jayme Mendal,

    You nailed it, getting the property below value is key - though determining market value on a MF (which I am pursuing) can be difficult.  When working my numbers for a potential property I work backwards to determine my asking price - I estimate 100% financing with a goal of $200 cash flow/unit/month.  If I can achieve a minimum of $200/unit with 100% financing, then it is worth pursuing. 

    With that said, the current rate for a HELOC is lower than current mortgage rates, though the HELOC typically has a 20 year term and variable rates (in turn a higher payment each month than a traditional 30 year loan). This doesn't mean you need to pay off the HELOC right away, but it is probably wise to consolidate the debt into a single loan and take advantage of current low rates (just my newbie opinion!).

    Jeff S,

    "Really though the biggest risk is being afraid to take a risk and ending up with very little IMO."  - Well said! 

    0Reply
  • Jeff Rabinowitz
    Investor/Landlord 路 Farmington Hills, MI 路 Member since 2011 路 1k+ posts 路 1k+ votes
    12y

    I deploy my HELOC as often as possible. The interest rate is much lower than any other financing available. Mine allows unlimited draws without charges and only requires monthly interest payments. I keep the account for my rental properties at the same bank and the accounts have online access. Making the payments is quite simple. When I deposit a rent payment I simply transfer it online to the HELOC account. That counts as a payment. If I need the funds again (or have another opportunity to deploy them) I simply make another draw on the HELOC. I sweep funds from my other accounts to the HELOC a couple times weekly. I never have to remember when a payment is really due, minimize interest charges, and usually have the ability to write fairly large checks at very low rates.

    My rentals are not in LLCs.  This strategy would not be advisable if your properties are in LLCs.

    6Reply
  • Brandon M.
    Agent / Investor 路 Clearwater, FL 路 Member since 2014 路 573 posts 路 281 votes
    12y

    The one suggestion I would make: Don't tell the bank giving you the HELOC that you want to use it to acquire more property. Some banks aren't fans of that, so just tell them "property improvements" as the general reason.

    When I got mine, the mortgage broker taking my application just said "I will pretend I didn't hear that" when I told her I wanted to use it to buy more real estate.

    7Reply
  • Jayme Mendal
    OP
    Cambridge, MA 路 Member since 2014 路 5 posts 路 8 votes
    12y

    Jeff - Why do you say the strategy is not advisable if your properties are in LLCs?

    0Reply
  • Andy Collins
    SFR Investor 路 Dallas, TX 路 Member since 2011 路 604 posts 路 243 votes
    12y

    go ahead and get the HELOC and pull the cash out, park it in a checking account for a couple of months.

    If you wait to pull it out, when you go to get a mortgage they will want to see where the downpayment came from, and will look at your last two bank statements.

    If the money appeared during those two months they will want to know where it came from,,,they will NOT approve the loan if the money is borrowed.

    They bank will want to know where any money that went into your accounts during those two months came from,,,they don't want you to borrow the downpayment.

    Again, "park" the money in a checking account a few months  ahead of time and it won't be a problem

    5Reply
  • Karen Schimpf
    Lender 路 Nat'l Commercial Mtg Lender - Round Rock, TX 路 Member since 2014 路 916 posts 路 235 votes
    12y

    @AndyCollins is correct. Bankers will look at how long your down payment has been seasoned. If you are going to use a HELOC, you will have to draw on the HELOC 3 months prior to the purchase so you can provide the lender with 2 months of bank statements.

    2Reply
  • Mark Creason
    Real Estate Lender and Broker 路 Dallas, TX 路 Member since 2013 路 966 posts 路 500 votes
    12y

    Some commercial lenders may have seasoning requirements to take out cash.  Check with your lender to see if your strategy will work.

    Mark

    0Reply
  • Senad Salihovic
    Louisville, KY 路 Member since 2014 路 34 posts 路 0 votes
    11y

    I am thinking about doing the same, 

    I will only need 12k for down payment on a property I found, I have 6k cash and would like to get 6k from home equity. 

    I have 50k in equity. 

    Would I be able to use it instanly or would I have to wait 3 months? 

    0Reply
  • John Francis Gajita
    NISHI TOKYO JAPAN 路 Member since 2016 路 3 posts 路 1 vote
    9y

    having trouble with our house

    my parents have an 1M peso equity worth 2M but they will be on the unemployment side next soon, my plan is to use HELOC to buy a 4 unit apartment when I come back home in the philippines how can I use my parents HELOC although I don't have any experience credit score just paycheck here in japan where I work.

    really need some help guys 馃槥

    1Reply
  • Priti Donnelly
    Kitchener-Waterloo, Ontario 路 Member since 2015 路 85 posts 路 28 votes
    9y

    Hi @John Francis Gajita If my understanding is correct, you want to try to use the equity from your parents' home to secure a line of credit to purchase a 4 unit apt. And the problem is that you don't have credit history or paycheck in the Philippines to qualify. 

    Since you are employed in Japan, have you considered applying for bank financing in Japan itself? You could put that toward a Japanese cash flowing apartment. Then with your cash flow, build your bank account in the Philippines. And, combined with your parents' equity, this could help you reach your goal.  

    I don't know how long you've been living in Japan or have been employed, but it's a thought.

    0Reply
  • John Francis Gajita
    NISHI TOKYO JAPAN 路 Member since 2016 路 3 posts 路 1 vote
    9y

    @Priti Donnelly yes your right I want to use the equity of my parents house to purchase a 4 unit apartment so that we can rent our house or fix and sell it.

    I'm just a trainee here in tokyo japan it's not possible for me to acquire anything here because of the rules of our agency, this is my first job and working now for 2 years. this is my last year though, that's why I'm scared because I don't have a job when I go home, so it will be hard for me to be able to get a loan when I get back home. any advice thak you for your advice I'm very grateful that someone answered my post.

    0Reply
  • Priti Donnelly
    Kitchener-Waterloo, Ontario 路 Member since 2015 路 85 posts 路 28 votes
    9y

    You are very welcome @John Francis Gajita. Good luck. I hope your experience in Japan leads you to a stronger position in the Philippines.

    0Reply
  • Michael BarbariPro Member
    Banker 路 Downers Grove, IL 路 Member since 2014 路 396 posts 路 107 votes
    9y

    @Andy Collins @Karen Schimpf

    Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

    0Reply
  • Anthony Vann
    Investor 路 Hampton, VA 路 Member since 2017 路 49 posts 路 86 votes
    9y
    Originally posted by @Michael Barbari:

    @Andy Collins @Karen Schimpf

    Your statements are not correct. You are allowed to use your home equity for downpayments. There is no need to pull it out and waste 2 months of interest parking it in an account.

     Can anyone elaborate on this at all and possibly give a real life example?

    0Reply
  • Brandon Heimsoth
    Investor 路 Maryland Heights, MO 路 Member since 2016 路 55 posts 路 36 votes
    9y
    Jeff Rabinowitz why do you say this (HELOC for down payment) shouldn't be done with properties under LLCs?
    0Reply
  • Karen Schimpf
    Lender 路 Nat'l Commercial Mtg Lender - Round Rock, TX 路 Member since 2014 路 916 posts 路 235 votes
    9y

    @Anthony Vann and @Brandon Heimsoth, if all your liquidity (down payment, closing cost and reserves) comes from your HELOC, than the lenders typically will be looking for mitigating factors to strengthen the deal. So if you want to use your HELOC, do you have some other strengths like: experience in owning other apartment buildings; your personal income is able to cash flow the property; your putting more down on the purchase; the debt service on the property is higher than 1.25 etc.

    0Reply
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