Heloc on Heloc on Heloc forever?

77 Replies

I just took out a HELOC to use as a down payment an investment property. My monthly payments will be low (interest only for 10 year draw period), so shouldn't really affect my debt to income ratio much.

Once I buy the investment property, can I immediately take out a HELOC on the investment home? Since I am putting down 25% and the house will appraise for more than I bought it for, the numbers should work.

And then can I do it again with the house I buy using that HELOC as downpayment? And keep doing this forever and continue to buy more properties? Or am I missing something?

@Michael M. Simple answer is Yes. You will need to find a bank that will not require you to “season” the property though. Meaning, many banks will take the purchase price instead of the appraisal price within the first year of purchase. They do so to avoid lending to customers that want to do exactly what you are doing 😁. Don’t be discouraged though. I found a small local bank in my community that is very investor friendly. They don’t require me to season the property and they’ll loan based off the purchase price + renovation costs. They’ll loan 80% Bottom line is you can absolutely do this, you will just need to find the right bank. One other thing to note, these loans are commercial, no residential personal. The guidelines for commercial are much more Investor friendly.

Yes you can. Just make sure you don't get over-leveraged. As long as the properties cash flow significantly you should be able to weather vacancies and market downturns as long as rents don't drop too dramatically. As always, plan worst case scenario and if the numbers work, go for it. 

@Michael M. thanks for the post--great question. Thanks to the others for the quick responses as well. I am in a similar situation so this helped me.

I'm up in Westchester and my question to you is if you used a local bank for your HELOC or a large institution? I'm looking for a bank around here to build a relationship with to assist with the launching of my investing career.

Originally posted by @Michael M. :

I am putting down 25% and the house will appraise for more than I bought it for,

Why will it appraise much more than you bought it for?  Are you just getting great deals to prepare to rehab then rent?

Great concept though; can you share your numbers on an example?

What a great thread! I was thinking of doing this yesterday and so glad that I found this info.

One question I have, some what related but different. I have a heloc on a rental property with available funds of 50k. My primary house is just about paid down 20%, so I'm in the process of removing PMI and getting a heloc on my primary.

My question is, can't I write a check from my rental property heloc for 50k, to my primary mortgage, get my pmi removed, then get a heloc on my primary?  And that extra 50k that my primary just decreased by, will help me get a higher heloc on my primary.  

Is my logic right in doing this?

Originally posted by @Greg Junge :

What a great thread! I was thinking of doing this yesterday and so glad that I found this info.

One question I have, some what related but different. I have a heloc on a rental property with available funds of 50k. My primary house is just about paid down 20%, so I'm in the process of removing PMI and getting a heloc on my primary.

My question is, can't I write a check from my rental property heloc for 50k, to my primary mortgage, get my pmi removed, then get a heloc on my primary?  And that extra 50k that my primary just decreased by, will help me get a higher heloc on my primary.  

Is my logic right in doing this?

Greg, I just came upon this post and didn't see that anyone answered you. As per the first part of your question regarding taking a HELOC from your rental and applying it to your primary. I'm not sure about this and it warrants some research, but I recall reading something regarding whether your rental is in an LLC. If so, I believe your Operating Agreement needs include wording that allows a HELOC to be taken out as a loan to the members, with the agreement that it needs to be repaid. Then the Promisory note needs to be recorded with county. Otherwise the "veil" may be pierced.

Just because you put 25% down doesn't mean the new property will appraise for more than the purchase price. Maybe it will, maybe not.

If it does, it probably does so because of all of the renovations you do to it (costs $$).

And when going for that new HELOC, you will only get 70% LTV.

So your scenario is possible, but it will require a combination of a) buying right b) forced appreciation c) buying right again d) probably some of your own savings

Just entering into this scenario myself: leveraging 70% LTV HELOC + $15k rehab loan on investment property #1 to fund rehab on cash property #2. Anticipating 2 month turnaround on rehab so interest costs should be negligible, even on the higher rates associated with HELOC and improvement loan.

As @Mike Dorneman points out, local community banks that want your business are key to making this work. 

I really like this idea. To @Max T the money acquired by HELOC used for renovations should fall under a great local and state tax deduction. This can assist in paying back any funds owed for the HELOC. This may self-explainatory, but paying towards the principal of the loan lowers the interest applied from the lender..

thoughts??

Does anyone have a recommendation for a HELOC lender who doesn't require seasoning of the property? I am located in the Phoenix metro area (if anyone has recommendations for small local banks or CUs I should visit) but I would also welcome recommendations for larger institutions.

Thank you so much :)

@Michael M.

HELOC on investment property are only offered by three lending institutions, and only in some states. And the max LTV is 65 or 70%, and interest rates about 3% higher than primary residence Helocs.

This sounds great in theory but certain banks won't do HELOC on investment property, then other banks will cap how many they will do. Not to mention you have to be very organized with payments for each one. You can easily slip up if you're doing this on a handful of places.

I would recommend using the same bank for all of them, that's what I have done when getting them. 

You will also needs reserves for the new properties you're buying (usually 6 months worth of PITI), unless you're doing a commercial loan. I don't think they require it, but I would still do it because bad things come in 3s.

What would be the advantages to the HELOC over cash out refi? I get the HELOC on the primary residence where you can get 85-90% ltv but if you're limited to 70% ltv on an investment HELOC and it's going to be 3 points more interest than the primary aren't you better off finding a bank that will refi to 80% on an investment property and locking in the lower rate?

I have gotten a HELOC (or pursued one and chose another lender) on investment property with these lenders. There may be others, credit unions in particular, that will also do them on investment property.

Trustco Bank, US Bank, TD Bank and PenFed Credit Union.

@Seth Greenfield  

Seth, you are absolutely right in your reasoning. We have considered the refi option, but we like the strategy of repaying on the interest only. From an investment perspective, we are still evaluating all options. I am open to other suggestions if it mitigates the risk even a little. What would you suggest, if the money was used for a potential ground-up development?

@Kerry Baird That was the information I was looking for! Thank you so much!!

No problem, @Orlando Perez , as a few other BP resources helped me with that, too.  It took awhile to find lenders that would say yes.  I also like paying the interest only. And I subscribe to myFICO so that I know what is reporting, and how my scores look, before applying for new credit.

@Orlando Perez makes 100% sense. I didn’t think about trying to keep the repayment amount per month down. I wish I had a great suggestion I’m still more or less a noob just trying to learn!

I will say I’m in the process of closing on a heloc for my primary and applied with US Bank and they required 3 times as much information as a local bank here in OK did. Every time I would think I had given them everything they would come back with 3-4 more things. Nothing outlandish just a lot more of a hassle than the local bank was so I went that route.

Thanks all for sharing about HELOCs. I, too, am interested in acquiring a HELOC, but don't fully understand the implications when it comes time to refinancing a deal and paying off the HELOC.

Scenario:

HELOC 100K and $50K Cash

Purchase Price $120K

Renovation: $30K

ARV: 200K

When it comes time to refinance the property to pull all the initial investment out to redeploy the HELCO and Cash, it would seem I could do it since the refinance would be 75% LTV. But, wouldnt it be difficult to get a loan because of my debt-to-income taking the HELOC payments into account? It would seem like lenders would be hesitant to refinance the property and lend more money on top of the 100K HELOC debt. But I am guessing that is why it is key to discuss the intention with the lenders?

My next question is if I only use 50K of the 100K, would lenders typically consider that all 100k has been leveraged regardless of how much was actually used?

Thanks all for your input.