Looking to get my first property in the coming months, and a HELOC is my best financing option. Looking for a little advice on how to choose a HELOC based on making payments.
I can get a $70k LOC with a 95% LTV heloc from a local credit union. Payments at 1% would be $700/month. That seems obviously too high to lump into future rental income, so I'd want to pay that heloc back ASAP (for that reason, I'm mainly considering a BRRRR or buy and flip). Are there creative ways to make HELOC payments that are too high to lump into a deal? Can you use money from a HELOC to make those payments? For example, can I take out $70k, but set aside $8400 (and only use $61,600 on the property) to make the first 12 months of payments until I can flip and sell or refi? I also have $10k sitting aside, earmarked for investing. Would it be (un)wise to use that $10k to make the payments for up to a year?
Another option would be to take a 90% LTV loan from a different credit union that is interest-only. Much more affordable payments and I could likely lump those into the deal.
Either way, I'd be wanting to pay the LOC back within 6-12 months to free that money up and move onto the next deal.
Thanks for any thoughts. I'm a newbie, so happy to receive any thumbs up, thumbs down, and/or suggestions that will move me forward.
Technically you can do anything you want with a HELOC. I would try to get an interest-only HELOC and use it towards a BRRR or flip. Your strategy is essentially using 100% financing for your deal and can work if you have the numbers calculated correctly and keep some cash on the side as well.
If the payments are too high in the beginning, it won't magically get better in the middle or at the end. As the saying goes, deals are made in the front end, not the back end.
I went through my local bank and received 80% LTV @ 4.5% interest only payments like @Bob Okenwa mentioned.
I can pay off at least half of the HELOC once I refinance this duplex im in the process of buying now. But I wanted to make sure that I could add equity to it from the start.
Just to clarify, my goal is to only go after a deal that gives me (and my money) an exit strategy in 6-12 months. I don't plan to carry a balance on the heloc for any given property longer than 12 months. Ideally, I'd love to BRRRR, pay the heloc balance with the refi, and let it sit at balance $0 with no more payments until the next deal.
@James Clements yes, the goal would be to find a deal that I can fund all on my own, which would be made easier if I go the route of the 95% heloc - it gives me $20k more in hand. If I go with the 90% interest-only, there's a greater likelihood of needing to partner with a private investor.
Question: you said I should go interest- only especially because this is a short-term strategy. Can you explain more about why that is? I was thinking because it's short-term, I can temporarily swing the large payments for a few months, until I can pay it back after a refi. The benefit being more money in hand, and no need to pay back an investor. Thanks for your thoughts!