I am an advocate of the BRRRR Method, and I have put this into action this year. I took out a HELOC last year, and got a great rate and am paying interest only for ten years. I used that HELOC to purchase two great cash flowing properties. I have done some good work to improve the values, and even brought the rents up. In a couple of months, I plan to refinance those two properties, and take cash out. Considering appreciation, the fact that I purchased below market value, and the work that I have done on the property... there is a chance that I may be able to recover my original HELOC amount. I am not positive, but I am just getting an idea for it IF I can.
Would it be advantageous for me to pay off the HELOC (as a sign of good faith and to show that I can pay off loans quickly), and then take out another HELOC to invest more... or because I am still only in the first year of a ten year HELOC, it doesn't really matter and I should just reinvest the cash?
Would love some feedback from someone who would know the pros and cons from a lending standpoint, or even @Brandon Turner on #AskBP (even if he DOES say there is no right or wrong answer, just a right or wrong answer for ME... kidding, kidding).
The winning name of the real estate game is leverage. The more you can leverage the bigger you can grow. My recommendation is to reinvest.
I think it depends on whether this is a true HELOC or if it a 2nd mortgage.
With a true HELOC, you can draw and repay money as you like (within certain minimums, of course) with no closing costs and you don't have to requalify for the amount the next time you draw it up from zero.
If that's the case, then I'd go ahead and pay it off and save the interest expense if you aren't actually using the money. You can always draw it back up again at a moment's notice if necessary.
If it's a 2nd mortgage and you have to pay closing costs and requalify every time, then I'd say leave it. Pay the interest and put that money back to work asap.
I agree with @Linda Weygant on this one :) And I'll try to answer it in an upcoming show!
In your original post you mention paying off the HELOC (sign of good-faith) and then opening ANOTHER HELOC. With a true HELOC, you don't need to close the original HELOC during the draw period (10 years as you stated). You can treat it like a credit card; you only pay interest on what is outstanding, and you can pay off any amount over the minimum due. It's better than a credit card in that it's interest only during the 10 year draw period (great from an investment standpoint), because that makes your minimum obligated monthly payments lower.
I would keep the HELOC open because it's a quick and easy source of funding for your next deal. Sure, pay it off if you can when you refinance and avoid interest, but don't close it.
Hope this helps!
I agree with Linda. Also depends on your interest rate as well.
Just for my own clarification, when we use a HELOC for this sort of strategy (BRRRR), we are talking about paying the full purchase price and rehab price with the HELOC, allowing for the necessary seasoning, and then repeating the process.
We are not talking about using the HELOC for a 20%-25% down payment, and rehab, correct? I'm pretty sure this second strategy doesn't work, but can you help me understand why? Or perhaps why I'm wrong? Thanks
@Kyle Sutton - the strategy works just fine regardless of whether you are paying cash or obtaining financing.
For example (oversimplified - does not include all costs):
Purchase price - $50,000
Rehab - $10,000
ARV - $100,000
Pay 20% of purchase price as downpayment and $2000 of closing costs - $12,000
Pay cash (or charge on credit cards) - $10,000 for Rehab.
Total cash in - $22,000
Refinance at 75% of ARV (some banks will do more, but mine does 75% on a refi of an investment) - Loan for 75,000
Pay off $40,000 from purchase loan
Pay self back $22,000 from downpayment and rehab costs
Net cash in pocket - $13000
Monthly Rent on a $100,000 house = $1000
Monthly Principal and Interest on $75,000 loan - 358
Monthly Taxes and Insurance - variable. Call this one $60.
Bunch of other ordinary expenses - $150.
Monthly profit - 432
Thanks @Linda Weygant . I can wrap my head around that example. Part of me says "numbers that work out like that are too good to be true", but I guess that's the point. Go find a great deal.
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