HELOC trigger and then use funds to buy another. Good idea?

Question

BP Family,

I’m thinking about taking a 100k heloc on my investment property (it’s a condo). Interested to learn how others have used this approach to use the funds to buy another property. What is your approach or framework to make a deal work while paying down the heloc from years 11-30? The whole thing gives me a headache trying to figure out how to make this work and thinking about just putting my head down to save up 25% then ready to buy the next one. Thoughts?

Jody Sperling · Answer

Get a 1st Lien HELOC or don't bother using one, as it will force you to pay two cashflow responsibilities.

I have a 1st on one of my rental properties and use it as my bank account. My whole paycheck goes into the HELOC, my whole rent role and any other monies I earn. I pay everything off credit cards, except the one mortgage I have. At the end of the month as bills begin coming due, I pull that money from the HELOC and pay the bill, restarting the cycle.

This works so well because the 1st replaces the mortgage on the property it applies to, "freeing" that cashflow to go directly to principal. If you had a 2% amortized loan on the property before, but were within the first 10 years of the mortgage, you were paying anywhere between 20% and 50% in simple interest (because amortized debt is front-loaded). Your HELOC won't be any higher than 5% simple, but more likely somewhere in the 3% range.

There's no better way to keep 97% of your money, all the time. You'll have better luck finding this kind of HELOC from local banks or credit unions than you will getting one with a national bank. Best of luck!

Andrew Postell · Answer

@Allen Wu sorry I missed this post previously but if you are still looking for some views on this here's what most investors do with a "Line of Credit".

A line of credit should basically be treated just like a credit card. What this means is that a Line of Credit is NOT designed to be a permanent financing solution. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. Rates are low now...but what will they be in 5 years?, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

However, if you use it to say....buy another property.  Then flip that property...thus paying back your Line of Credit.  Then that's perfect!  Because you will never get surprised by an adjusting rate or keeping a balance on it.  Lines of Credit are PERFECT for people who have a plan to pay it back.

Or if you were using it to buy another property, then refinance that property with a "cash out" loan, to pay back your HELOC...then that is a really good use too.

On the other hand, if you were going to use that Line of Credit  on a property that you were looking to buy and hold for 30 years....this would be very counterproductive. The 30 year fixed rate loan would be a better fit for this purpose.

I hope this helps a bit better with how they are used.  Feel free to ask anything else if you need.  Thanks!