I would like to know if is advisable to buy a home to fix and flip and close on it with 100% of the payment coming from my HELOC. My home is free and clear and I have a $250,000 HELOC. I would like to buy, say, a $150,000 home, renovate it and flip it within 6 to 8 months. I don't know that I can get any other type of loan right now given my circumstances. That is why i would like to use my line of credit to make the purchase.
Any comments or suggestions would be greatly appreciated.
If you already have the HELOC at $250k and you have a good project I don't see any good reason not to put the money to work.
Have you checked the line recently? A lot of credit lines got cut back severely during the credit crunch.
What are the terms on the line?
Chris, the risk that you will take in funding this way is that the fix-n-flip may take more repairs and/or take longer to sell than you anticipate. If so, you will incur higher interest expenses on the credit line. Worse than that, the bank may suspend, reduce or call your line of credit during a time when you can't refinance either home and can't sell your f-n-f (not a vulgar term). You will then risk losing your current residence while chasing this investment.
Just point out the risk ... a very real risk.
The loan is still active and shown on my financial page where my managed accounts are held.
The terms are interest only at the rate of prime minus .51% which makes the overall rate below 3% right now. I looked at the loan documents today and it is a 15 year loan and no exclusions except for illegal activities.
Someone else mentioned that they thought of a HELOC as 30 day money which I did not understand.
I'd grab all the money you think you'll need, and then some, from the HELOC. In your other thread, you said its good to go. But you also said you're unemployed. The bank may give the HELOC another look when you try to take the money out. You don't want to get halfway through and not be able to get the rest of the money.
I'd think about locking the interest rate after you get the cash. It may be higher, but the floating rate can change at any time. OTOH, its unlikely they would jack up your floating rate to hard money rates.
I'd be nervous about doing this because it puts my residence at risk. If you end up being unable to make the payments and the lender forecloses, it will be your home they take, not the flip. A lot of folks would agree with Bryan that you should "put the equity to work". I'm not sure I do. If you own your home free and clear, at least you'll have a place to live even if other parts of your live have issues.
What do the terms say about the bank calling the loan or reducing the loan once it is used?
I would be more worried about a balloon or call provisions than anything else. If that happens and you can't get other financing you will be in trouble.
This is really hard to answer without knowing more about your personal circumstances. If you really do have $100k left on the line after the purchase I think the risk is low unless you go crazy with extra repairs or you have to sit on the property forever.
Do you have any non-HELOC liquidity?
I appreciate your candor. I am already apprehensive about doing my first flip since I will be going from no debt to having debt. However I have built and staged many homes and gutted and remodeled the one that I am in. I loved the process of changing a dump into something very nice.
I have 25 years of experience as a home builder and 30 as a RE broker. My credit score is 860 and I have a good size IRA that I could use as collateral. My income has been considerably above average for the past 20 years.
My situation is that as a builder my income has been almost nonexistent for 09 and 2010. I have been working on some other endeavors that have not panned out yet. They should in a few years.
I am concerned that if I went in for an investment loan, that I may get turned down and they may also change the limitation on the HELOC. It seems like my only ability to invest in a flip.
You guys are great. Thanks for being so helpful.
I have about 50K liquid that I could use.
I skimmed the loan docs. today and the only thing i found was that they have the right to terminate or accelerate the loan if "you will not be able to able to meet the repayment requirements set forth in this agreement due to material changes in your financial circumstances."
That doesn't sound very good. What so you think?
I've bought 3 of my 4 rental properties with HELOCs, from each previous property. I do have one on my primary residence as well. Yes, there's risk but my husband and I do have a cash cushion to pay off the HELOC on our primary if something goes wrong. There's risk in all investments but it sounds like you can get the flip done successfully, given your background. Good luck!
I wish you could share all of the docs with us. It sounds like a good use of your money given your background and talents.
Ultimately it is a risk/reward decision.
Chris, you could easily get caught in a perfect storm and lose alot ... namely your residence and this fix-n-flip.
Since your income these last 2 years is nonexistent and it will still take some time for your other income to start generating, IF you NEED to get a loan, you would have a very hard time qualifying.
My suggestion, get a partner or 2, incorporate and go to it. By incorporating, you limit your exposure.
I'd really think twice (or more) about using the HELOC for funding this. It sounds like you are buying a job.
With your high credit score, don't you have lots of credit cards sitting empty with usable lines of credit? I get those cash advance checks in the mail all the time with a 3% transaction fee and 0% interest ranging anywhere from 6 months to a year. You probably have at least 100K that you can tap into without risking your personal residence.
Add 'em up and be sure to read the fine print.
Thanks for all of the great advice. I am a risk taker but do not want to risk losing my house if things don't work out. Some of your cautions are well taken and I thank you.
I am probably trying to "buy a job" because it is the only viable occupation that goes with my skills, in which you have the potential to make some good money.
Incorporating as a LLC and getting a partner may be the way to go or maybe finding a property under a 100K and put the 50K cash i have into it, with the other 50K coming from the HELOC.
The other idea that I have read a lot about is finding pre-foreclosures that you could sell wholesale or maybe buy it subject to the Sellers loan keeping your money invested to a minimum.
Are there a lot of folks in this forum that wholesale property? I just like the idea of creating something and not just shuffling paper, although shuffling paper for 10 to 15K per deal may be worth the shuffle!
I really want to get involved with this and there must be a way...
That's it, I can charge the house :) That actually is a pretty good idea on the surface of it. I only have two credit card. I have always paid my credit cards off every month since I can remember.
The one card has $65,000 as a limit!! The other is only 15K. I get applications all of the time. Maybe I can get more cards and do what you are indicating.
That's really creative thinking. There is more the one way to get this done. I will look into getting additional cards.
Risking my paid for home would be too stressful if the flip house doesn't sell right away.
Thanks for the idea!! Anyone else want to add to that strategy??
i say go with the heloc. your minimum payment on the heloc for 150k is about $337 a month. talk about cheap money! most car payments are more than this.
you can swing that payment no problem (even if you just took an extra 5k out and threw it in an account for a year to take payments from).
if it were me though, instead of doing one $150k house, i'd probably do two $75k houses or 3 $50k. diversify a bit.
I'd use all three. Heloc, Credit Cards, and a bit of cash. Keep your reserves with the cash. Use the CC for the house and Heloc for the repairs, or visa versa. Whichever has less interest, put the most on. Keep your cash on hand for the payments and worst case, whatever you get into, make sure you can rent it for what your payments are.
Have you thought about doing flips using your IRA? Or did you not want to do that due to needing to use the profits? You could be buying junkers, leveraging the money with your ira, and fixing them with the IRA, then cashflowing into it.
You said your slow, so the combination of all these things could keep you busy.
I know were offering up to 12% interest for IRA money that is secured by a 1st on a property.
I take a different approach, but I'm more of a risk taker than most of who have contributed to this thread.
I would move 150K + rehab costs of that HELOC to a high interest bearing account (like a Money Market so that you can write checks against the account). Fund the acquisition, and depleate from the account to pay rehab costs. Then, the money is not in the HELOC account and can't be frozen by the lender.
Where else can you find money that cheap?? A partnership could be profitable, but I personally don't like partnerships. A HML will be tough to come by if you're not showing any sort of income. Plus, the rates you'll pay with splitting profits on a partnership, or the interest rate to a HML will severly be more than the miniscule amount you'll pay to the HELOC lender.
The HELOC on my primary home was frozen several years ago. I have the money to pay it off, but won't until the loan terms require. By keeping the money liquid for flips, etc., I'm much more profitable than if I pay it back now. I have never seen a lender call a HELOC due before it was frozen. Plus, if it was called due, and in the worst case you don't pay it, you'll still have the rights of redemption (although I don't know what the specific rights are in Missouri) in the ABSOLUTE worst case.
To me, it's more of a no-brainer to use the HELOC then any other borrowed form of funding.
One thing to look at with the HELOC is the index - is it indexed to LIBOR or Treasury?
Thanks for breathing some life back into this thread and thanks for your comments Joe, Mark and Steve.
I don't know much about using an IRA for investing with. I have read a little about it but my financial planner probably wouldn't advise me to do that because it would be talking money out of the stock market that he is getting paid a commission on. I would need to work through that if has possibilities.
Steve - I don't know what index that the HELOC follows. Does it make a big difference?
Mark - I like your way of thinking. It makes logical sense and is a clean deal the way you described how you have done it. It is a bit risky and you would have to come up with the money to fulfill the terms of the redemption if it came to that.
So you would pull as much money out of the Heloc as you could when you find the right property to buy and cover the renovation and carry cost, right?
I used to have a lot of personal debt years ago. I have lived debt free for the last six years and going into debt does not thrill me but I am kind between a rock and a hard place if I want to get involved in REI.
I couple of the posts here made me have a bit more pause but I don't know how to go about REI without taking some risk on.
I will be getting more involved with an investment as time allows and hopefully i will learn more.
Any other thought are welcomed.
Originally posted by Chris Barry:
Steve - I don't know what index that the HELOC follows. Does it make a big difference?
When LIBOR and Treasury are moving similarly (in both direction and percentage rate), then there is little difference. But they don't always move together, and the index could be more favorable for one over the other as a result.
LIBOR had some really atypical movements early in the "recession" that caused anything indexed to LIBOR to have a higher rate; this was because the banks weren't trusting each other enough to lend to each other!
I have used a HELOC on my personal residence several times to purchase a home when an all cash offer was required or when time was of the essence. I think the previous responses have covered the risk and benefits pretty well. It comes down to what you are comfortable with. My biggest fear was the bank freezing my line so I always withdrew all the money I would need plus some cushion before the closing. You won't find cheaper money than a HELOC and an interest only payment keeps the holding cost very low. Often my total utility payments exceed my HELOC interest payments.
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing