Using a HELOC to buy an investment property

22 Replies

Hi All,

My parents have been kind enough to offer me access to a HELOC on their primary residence. I have been buying student rentals and been doing well so far. They have seen my success and offered to help me grow even further. Has anyone had any experience paying for an investment property (in full) with a HELOC? I have seen a lot in the forums about using a HELOC for the down payment but have yet to see a thread about buying an investment property outright using one. Is it allowed/possible? Any advice is greatly appreciated. Thanks!!

Of course you can pay cash (HELOC) but why would you want to. It is not the most financially advantageous to have equity sitting dead in a rental. Equity (cash) valued generally at about 10% kills a properties cash flow. Far wiser to mortgage to the maximum when rates are only 5% rather that bury cash worth 10%.

Greg S. Thank you Greg. So since I don't want to tie my money up in this property would you suggest using the HELOC for the 20% down and then mortgage the remainder?

Yes. Chances are the HELOC and mortgage rates will be close to the same. What you are doing in essence is spreading your money around and buying income properties with 100% financing. Return is infinite.

The theory that paying down a property with a DB in order to have positive cash flow is false economics. Cash in a property does not increase or create cash flow because of the fact that the cash must earn a return separate from the property itself.

A income property that does not produce positive cash flow with 100% financing will never have TRUE positive cash flow. Paying down a mortgage creates false cash flow, smoke and mirrors.

I invest and use my HELOC as my business working account, income in, expenses out. I do not hold any cash or emergency funds as long as I leave room in the HELOC.

@Andrew Marzec I have used a heloc to buy a property out right. I then used the heloc to rehab it get a tenant in it and season it. As soon as I could I did a refi on the rehabbed property paid the heloc off then repeated. If your fast enough you may be able to do delayed financing on the rehab so you don't have to season the rental.

What @John Powell said. If you have enough to buy cash and rehab, just use the HELOC as nice, cheap short term money. Then refi and repeat. It's a beautiful thing.

@Andrew Marzec , I'm not convinced your Lender would be happy to grant you 100% financing, given that you would be up for repaying your parents' HELOC too, right? ie. YOUR Lender can't come after your parents' primary if you renege (ie. only your parents' Lender could).

On the other hand, if your parents want to GIFT the money to you, then they/you need to make sure the IRS is completely apprised of that situation.

(If I'm wrong about any of that - please let me know how). All the best...

@Kyle M. The HELOC is 100k and the properties I buy are 60k-80k depending on how many bedrooms. I am investing in upstate NY. Not sure how long I would have to wait to refi but it does sound like a very good idea. The fact that I could repeat this strategy over and over is excellent as well. Thanks!

search delayed financing it is when you close with cash then quickly get financing in place. It is a goood option if you want to be able to move very fast on a close, do repairs to run guy up to a financeable condition and get a lease in place. I'm not sure on the time lines. 

You can't use your parent's HELOC as funds for a down payment on an investment property. The funds would have to be considered a gift, and they would need to sign a letter stating as much.

And unfortunately, you can't use gift money to buy an investment property.  

You can get around this by putting your parent's on the mortgage with you. The funds would no longer be considered a gift, and would be allowed for the down payment. 

Run the numbers. If the numbers make sense, then use the HELOC. If they don't make sense, then don't use it. You need an evaluation system. We have a deal management system where we run every single property through it and it allows us to adjust using a 1st and a 2nd, different down payment amounts, different interest rates and terms (interest only versus amortized) and different costs and points.

I can tell you this: Using leverage, even for buy and hold properties, when done correctly will supercharge your returns.  If you are able to do 100% financing of all costs and generate just $50 net income per month, that is an infinite return on your investment.  Give me as many of those deals as possible please.  The risk with leverage s being overly levered when the market turns an your vacancies increase, your rental income decreases and you don't have enough income to cover your expenses (negative cash flow).  But there are ways to manage and shift that risk.  PM me if you have further questions.

@John Powell I know this thread's a little old but John I wanted to ask you a quick question regarding HELOC's for downpayment. I'm looking to do the same thing.. so the only way to get your money back to repay the HELOC is if you refinance AND the property has gained enough value, correct? Otherwise, what happens if I'm stuck paying interest on my HELOC, has that ever happened to you? Wondering if anyone might mind sharing some not-so-perfect endings using this method.

Thank you all!

Originally posted by :

so the only way to get your money back to repay the HELOC is if you refinance AND the property has gained enough value, correct?

 Christian, for investment properties, you want to find something to buy that is under market value, that way you have instant equity in the home when you buy, and you don't need to cross your fingers that it'll appreciate (like everyone was crossing their fingers in 2007...)  So, search hard for a property that's undervalued, and that's how you make your $$.  

@Christian Nachtrieb , if you're trying to use the "BRRRR strategy", you do want "the property to have gained enough value" for all your deposit (whether HELOC or cash) to be returned via the refi. Nonetheless, the numbers should have already been calculated to show that the property would still cash flow anyway! ie. So what if you're "stuck paying interest on your HELOC"?...

Hey @Brent Coombs that makes total sense on all accounts, and based on my numbers the property WOULD still cashflow paying the HELOC interest. My primary concern is after the 10 years of interest only payments the principal then comes into play. I guess my question is, is it better to find a way to pay off the HELOC at all costs and avoid those bigger payments, or just plan for having the HELOC for its entire lifespan?

Thank you SO much for your help. Really appreciate it Brent!

@Christian Nachtrieb , "interest only payments" (for the loan balance)? Yes, I reckon you should want to Refinance out of such an interest-only loan soon, into a normal fixed amortization over as long a period as possible. I'm not a fan of 5 or 10 year "balloons". And yes, you want that Refi to cover paying out your HELOC too (so you can re-use it for your next investment)! Cheers...

my bank offers a HELOC at a fixed 4.75% for P & I, as well as the interest only option at 5%...both for 10 years. I plan to use my extra disposable job related income to pay down my HELOC (20K)...and around 8 months have my entire LOC back. Is this better than the interest only option payment?

Originally posted by @Kevin Tramonte :

my bank offers a HELOC at a fixed 4.75% for P & I, as well as the interest only option at 5%...both for 10 years. I plan to use my extra disposable job related income to pay down my HELOC (20K)...and around 8 months have my entire LOC back. Is this better than the interest only option payment?

If you're always intending to reuse your HELOC in this way, why would you want to still owe $20k at the end of 10 years (after they've foreseeably closed it off)? Welcome to BP.

I reckon interest-only loans should only ever be used by folk who cannot afford to pay extra dollars per month than the barest minimum required. 

(Or, folk who choose to not pay extra because of their investments' expected appreciation).

Meantime, do you mind sharing what the $20k HELOC is for in the first place? (And next time?)...

Plan is to get 60k HELOC, then use 20-25k for down payment on rental property and get conv loan for remainder of balance on rental. Pay down my HELOC and be on sidelines for next rental opportunity...trying to learn the best strategy for using HELOC...goal is rentals.

Hey @Kevin Tramonte - I'm evaluating doing the same strategy by using a HELOC.

I just found this thread - how has everything worked out for you so far? 

Hey @Brian Cox - using a HELOC as a downpayment or to purchase additional properties is a common REI strategy. Just make sure to run the numbers in detail and not use your HELOC for any frivolous items, and you should be OK. There is, of course, additional risk by leveraging up but many feel like this is the best way to quickly build up one's portfolio.

I've just come into a 100k HELOC, and what I'm reading here is that I can use some of these funds for down pymt, and then finance a mortgage? Won't the bank frown on loaning me money on property, as I've already got a primary mortgage and now a HELOC? Thanks friends for answers!

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