HELOC for BRRRR Method
Lender · Santa Clara, CA · Member since 2018 · 46 posts · 74 votes
Howdy @Ashley Cao
I use a HELOC all the time with my deals in conjunction with a Private Money Lender (PML) and a LOC (No Cash). I only do BRRRR. I prefer to use Other Peoples Money (Private Investor) before I use any of my own (HELOC or LOC). The HELOC does have one main concern you will need to be aware of. Most have a variable rate. So if you use it have a plan to pay it off as soon as possible. Using a Hard Money Lender is more expensive, but, you don't worry about any rate changes. I'm told there are HELOC's with fixed rates that are a little higher. There are two big keys for me to successfully complete a BRRRR deal. Getting the ARV right and having the Refinance loan arranged before even buying a property.
Here's how I do it. 1. Find a distressed property. 2. Complete my analysis. Provide a report to my Private Lender and Refinance Lender (for pre-qualification). 3. Use a PML loan to purchase the property and pay for the Rehab (depending on total costs and funds available). 4. I use my HELOC to cover Down payment, Closing costs, and Holding costs. I also use it to cover any Rehab costs not covered by the PML. I use my LOC as a back-up if my other funding options are already stretched. 5. Once we start the Rehab the PM will start advertising for tenants. They are usually screened and ready to move in within a few days of the Rehab completion. 6. Start the Refinance process 4 - 6 months after purchase (depends on Rehab). 7. Refinance the property and get cash back (payoff original loan and HELOC). Note: The Refinance process can take 30 to 60 days. 8. Start all over with a new property.
Hi Ashley,
The first step is to try and turn your equity in to a heloc there are trillions of dollars in equity that just disappears with a change of our economy.Have it set up before something happens again. There are discussions on this web site for years about the best way to use them.You will see everyone has there own idea how to use them.search heloc payoff strategy.
The best question you can ask yourself is my money working for me or the bank ?
My parents have used a heloc to purchase a few properties actually. I really like the way they do it.
They're fortunate enough to have several 100K in equity. They take out the heloc and purchase the new property in full. They'll then refinance the new property with a lower, fixed rate mortgage, and use that to pay off the heloc. And then they do it again with another property. They're not rehabbing and renting, because they use this method mainly for vacation properties. But I don't see why the process would not be the same for a BRRRR.
Good luck!
Howdy @Ashley Cao
I use a HELOC all the time with my deals in conjunction with a Private Money Lender (PML) and a LOC (No Cash). I only do BRRRR. I prefer to use Other Peoples Money (Private Investor) before I use any of my own (HELOC or LOC). The HELOC does have one main concern you will need to be aware of. Most have a variable rate. So if you use it have a plan to pay it off as soon as possible. Using a Hard Money Lender is more expensive, but, you don't worry about any rate changes. I'm told there are HELOC's with fixed rates that are a little higher. There are two big keys for me to successfully complete a BRRRR deal. Getting the ARV right and having the Refinance loan arranged before even buying a property.
Here's how I do it. 1. Find a distressed property. 2. Complete my analysis. Provide a report to my Private Lender and Refinance Lender (for pre-qualification). 3. Use a PML loan to purchase the property and pay for the Rehab (depending on total costs and funds available). 4. I use my HELOC to cover Down payment, Closing costs, and Holding costs. I also use it to cover any Rehab costs not covered by the PML. I use my LOC as a back-up if my other funding options are already stretched. 5. Once we start the Rehab the PM will start advertising for tenants. They are usually screened and ready to move in within a few days of the Rehab completion. 6. Start the Refinance process 4 - 6 months after purchase (depends on Rehab). 7. Refinance the property and get cash back (payoff original loan and HELOC). Note: The Refinance process can take 30 to 60 days. 8. Start all over with a new property.
An alternative to putting more debt on your primary residence is to put the debt on the property you are acquiring, including the rehab dollars needed. That is called HomeStyle and can be done with 15% down to include all rehab funds needed. In this way all the debt is on the acquired property and your home is secure. Then when the property is rehabbed, sold, that loan is paid off and you are ready for the next one. I have done this for several investor clients. I'm happy to answer any questions. PLus no need to pay high rates/fees of Hard Money Lenders.
@Justin Bauer - Thank you for your response and advice! Will firm up a HELOC asap and get that money working for me ;) . The general consensus from the other HELOC threads advise to go through a small local bank or credit union, so will start the hunt there.
@Cason Acor - This sounds very inline with what I have been reading - thank you!
@John Leavelle - Thank you for detailing your process!
Also, I came across this podcast that has suggested the 'BARRRR' method to incorporate advertising as soon as reasonably possible so that you can potentially write off your rehab cost:
This info is a bit over my head since I'm still new, but thought I'd share and welcome thoughts.
@Perry Farella - Thank you! HomeStyle is brand new to me (yes, new knowledge!). Say for example, I go the HomeStyle route, I would either need cash to pay the 15% down, or I could use the HELOC which would lessen the amt of debt on my primary residence. Is this correct?
Does the HomeStyle loan cover only rehab cost, or it includes the rehab cost with the mortgage?
Thanks again for all your comments !
The reason I use the HELOC to cover Down payments is my Private Lender wants me to have skin in the game. Since Closing cost are part of the initial purchase process I just cover those too. Holding costs a property specific and occur monthly (Loan payments, utilities, insurance payments, etc ..) I do not use my HELOC for these as much. But, I have in some cases. I will usually use cash for them. Remember I want to use as little of my own cash as possible.
For me, starting the Refinance process occurs before I purchase a property. I get pre-qualified for the loan so I know what the terms/rate will be. It also provides the Acquisition Lender (HML/PML) and yourself reassurance of an exit strategy from the short term financing. I do not want to wait until I purchase and rehab a property to start looking for the refinancing. As you have probably seen on posts here on BP it can be very stressful to wait.
I keep my Refinance lender up to date throughout the process. From initial purchase, to Rehab, and when it's rented. They in turn let me know when to submit the required documentation. Typical lender requirements require the current mortgage/title to be seasoned for 6 to 12 months. Each have their own overlays for requirements. The fewer overlays can result in shorter seasoning requirements. Other basic requirements are the property must be habitable and proof of rental income or signed lease agreement.
As far as the "BARRRR" strategy goes, that is why I have my PM start advertising for tenants when we start the Rehab. It is all about tax strategy. Deducting some expenses in current year verse depreciating them over 27.5 years. Definitely check with your tax specialist before doing this.
As a side note: it is my understanding that using the Homestyle loan mentioned by @Perry Farella for investment (rental) properties is restricted to a 1-unit property or 2-4 unit properties would require you to live in one unit (House Hack strategy). Perry if I'm wrong please advise.
Dear All
To answer Ashley first: Yes HomeStyle can cover both acquisition cost and rehab costs added together. The 15% down payment is based on sum total of acquisition or sale price plus rehab dollars needed. You could then get a smaller HELOC for the 15% down and the rest of the debt is on subject property, not primary residence.
John's Question: HomeStyle is limited to one unit homes for Investors true but there is another loan called EZ Conventional that is designed for 2 to 4 unit properties for Investors who will never live in them to buy and get rehab dollars in one 30 year loan. Works very similar rot HomeStyle.
Thanks @Perry Farella, I’ll have to look into that one.