Investor · Houston, TX · Member since 2014 · 116 posts · 41 votes
I'm curious if it makes sense to use a home equity line of credit (HELOC) to fund the down payment & rehab on a buy-and-hold rent property, but I'm not sure what the exit strategy would be. If you just pay back the HELOC over time, it would be like having two mortgage payments (1--the mortgage on the new property and 2--the HELOC) and that would probably kill cash flow. So we probably want to see a different exit...
Can you do a cash-out refi or something else to pull out a lump sum to pay off the HELOC?
Here's an example of what I mean:
1. Obtain HELOC on Primary Residence A for $50,000
2. Purchase Investment Property B using the $50,000 for down payment, closing costs, and rehab
3. Refinance Investment Property B within a year to get the $50,000 cash out and payoff the HELOC
4. Now I have two properties (A and B) and one new mortgage (on B) but my HELOC is recharged to do it again
Is this possible? Or are HELOCs only ideal for flips? Or is there some other way to use the HELOC for buy-and-hold rent property?
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
12y
You can use the HELOC in any way shape or form. How you just described it is exactly what I did. Your time frame to recycle the full 50K investment is doable. You might only beable to pull out say 40K. Then you have 10K of the HELOC still tied up into Property B. The flow of capital is a roller coaster ride. Over time your helocs will get tapped out and you will then want to refinance them into portfolio loans. Robbing peter to pay paul and asking paul to lend to peter again works as long as you stay straight buying assets and buying assets that create enough flow of income to pay paul.
Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
12y
You can use the HELOC in any way shape or form. How you just described it is exactly what I did. Your time frame to recycle the full 50K investment is doable. You might only beable to pull out say 40K. Then you have 10K of the HELOC still tied up into Property B. The flow of capital is a roller coaster ride. Over time your helocs will get tapped out and you will then want to refinance them into portfolio loans. Robbing peter to pay paul and asking paul to lend to peter again works as long as you stay straight buying assets and buying assets that create enough flow of income to pay paul.
Investor · PA · Member since 2013 · 1k+ posts · 602 votes
12y
If your payments on both exceed what the market will bear for a rental then I would say it's probably not a great investment. HELOC interest rates is usually not any worse than mortgage interest rates. I have HELOCs that are maxed out which I will not be paying back in full any time soon. Consolidating credit card debt is another thing entirely since they have such high interest rates usually. You may take a hit on your credit by maxing out your HELOC though.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
Well, it can work, but there are wrinkles, good and bad. I funded not just the down payment but the entire purchase price of my first pure investment property with a line against my house, and refi'd later. Almost 2 years later, as it happened.
Positive wrinkles:
A HELOC is principal-only during the draw period. My draw was 10 years. So in theory you could pay principal only for 10 years waiting for natural appreciation and then refi;
Possible tax benefit.
Negative wrinkles:
When you describe refi-ing out "within a year", when I did this that was not possible. My credit union would not consider a value supported by the post-rehab appraisal for 12 months;
Your home at risk;
Your credit will take a hit is you draw all or most of your available line;
Cash-out refi on a non-owner occupied property is not a slam dunk, you are looking at 75% LTV at the most, healthy reserves and good credit or it is a no-go.
Bedford, NH · Member since 2012 · 2k+ posts · 1k+ votes
12y
I think you are getting into specifics that are beyond my expertise. Certainly beyond my personal experience. I don't know how that situation would look. Generally a lender wants to know where the down payment is coming from, and on't like it at all if it is coming from a, "partner." There could also be significant tax implications for the "partner."
Chicago, IL · Member since 2017 · 21 posts · 1 vote
9y
Is it a good idea to lets say take 100k from my heloc buy an investment in cash rehab it rent it out for two years then sell it after 2 years to avoid capital gains taxes.. then repay the heloc.. accoding to my calculations I would get large posotve rental cash flow for two years, then profits from selling?