Brand new to real estate investing. I own a home and have good equity in it so I'm thinking of getting a HELOC from my home to help buy my first short term rental property. I don't have much cash to my name so would this be the best way to get started on my journey?
Also would it be smart to get the HELOC and use a small portion of it to help pay off some of my credit card debt?
Make sure you evaluate your options between a HELOC and a "Cash out Refinance" especially if you plan on buying another investment home. Cash is king and a HELOC is a open end debt obligation and cannot be used as a liquid reserve which is required for an investment purchase. Banks/lenders require a PITI reserve (3-6 months worth of principle, interest, Taxes & insurance) in an account. HELOC's are also volatile meaning they are a risk based line of credit so since they are monitored monthly if your credit score changes or drops or your debt obligations increase the bank/lender can and will close or reduce your credit limit. That can be a huge downer when trying to finish projects or affect the down payment planned.
If you go and look at the data statistics show 85% of HELOC's eventually get paid off through a cash out refinance so at some point its a double hit to costs.
Make sure you evaluate your options between a HELOC and a "Cash out Refinance" especially if you plan on buying another investment home. Cash is king and a HELOC is a open end debt obligation and cannot be used as a liquid reserve which is required for an investment purchase. Banks/lenders require a PITI reserve (3-6 months worth of principle, interest, Taxes & insurance) in an account. HELOC's are also volatile meaning they are a risk based line of credit so since they are monitored monthly if your credit score changes or drops or your debt obligations increase the bank/lender can and will close or reduce your credit limit. That can be a huge downer when trying to finish projects or affect the down payment planned.
If you go and look at the data statistics show 85% of HELOC's eventually get paid off through a cash out refinance so at some point its a double hit to costs.
If you have a primary mortgage at a low interest rate then it may not be in your best interest to refinance for cash out. In that case a heloc may make more sense. I work at a brokerage and can help you shop for helocs. You can schedule a zoom call at alexandloans.com/contact
@Brandon Combs A cash out refi vs a HELOC is usually a math problem. Your current mortgage size and interest rate are two important pieces of info, vs the amount of cash you want out and what you can expect to pay on a HELOC or with a new cash out refi. HELOC's win when it comes to flexibility. But, they will have a higher rate and its a variable rate that will continue to go up every time the Federal Reserve raises the fund funds rate. Keep that piece in mind. a 6.5% HELOC rate will be likely be 7.5%-8% in 6-9 months time.
If you would like to review the numbers in detail feel free to reach out.
Hey welcome to BP! So, like you, I started with RE investing and used a HELOC. Weighing out both lending options was kind of easy for me because of the rates. Giving up a 2.75% rate on my primary wasnt going to be smart when I went into contract of my Duplex in May of this year. Like what others said, the con's of the HELOC is the variable rate (currently at 5.5%) which will probably go up again at least once this year. Just make sure the numbers work either way. Also keep in mind, with an investment loan, it does require 20-25% down so depending on your equity, that will need to make since also. Good luck!