HELOC or Traditional Loan for first property?

12 Replies

I am looking to buy another property for $350k and rent out my current house for $2400/mo. The bank has approved me for a HELOC of $100k with 4.5% variable interest and the origInal plan was to use the heloc to put the 20% down on the new house. But now I was wondering if I should just get One conventional loan to avoid having two loans (HELOC and conventional) and save the HELOC for another rental property. Of course this plan would require me to use $70k (20%) of my money from stocks as a down payment instead of using the heloc. Any input would be greatly appreciated. I think I’m on the right track but just want some confirmation and guidance please! Also this is my first post. Thanks!!

@Jason Ngo

Jason, first off, I'm always for fixed rate. And Real Estate out paces stock, hands down. 

So, if you have enough equity, I would refinance for fixed rate, and use it towards the other property. 

Ensure to get a good CPA that deals in income properties, because you can write off depreciation costs etc., also in a year or so you can upgrade if you wish, and do 1031 exchange.

Anyhow, hope this helps,

-Rudy Vazquez

Originally posted by @Jason Ngo :
I am looking to buy another property for $350k and rent out my current house for $2400/mo. The bank has approved me for a HELOC of $100k with 4.5% variable interest and the origInal plan was to use the heloc to put the 20% down on the new house. But now I was wondering if I should just get One conventional loan to avoid having two loans (HELOC and conventional) and save the HELOC for another rental property. Of course this plan would require me to use $70k (20%) of my money from stocks as a down payment instead of using the heloc.

Any input would be greatly appreciated. I think I’m on the right track but just want some confirmation and guidance please! Also this is my first post. Thanks!!

If you have cash ("money from Stock"- Hope you are not selling stock- and you mean your reserve) sitting on without being used, using HELOC wouldn't make sense.

If you dont have access to Cash, then HELOC can be one of the cheapest sources of money compared to private equity or Hard money lender. 

Originally posted by @Jason Ngo :
@Ashish Acharya

Thank you! So I should use the cash since I have it instead of the HELOC? I just thought it would be nice to use the HELOC and still keep my cash/stocks that are making oK money.

Your heloc will have interest around mid 6%. if your cash is making more than that, use helco, if not use cash. 

It also depends on your life outside investing. what is Your emergency fund ratio need? Do you need immediate liquidity. 

If your are strictly looking at the interest rate, don’t use cash unless cash is giving You more return than what you are paying in the helco interest. 

Even better use both to buy two properties. 

Originally posted by @Ashish Acharya :
Originally posted by @Jason Ngo:
@Ashish Acharya

Your heloc will have interest around mid 6%. if your cash is making more than that, use helco, if not use cash. 

It also depends on your life outside investing. what is Your emergency fund ratio need? Do you need immediate liquidity. 

If your are strictly looking at the interest rate, don’t use cash unless cash is giving You more return than what you are paying in the helco interest. 

Even better use both to buy two properties. 

Thank you for the great advice!  Its not part of the emergency fund.  I think I will use both to buy two properties.  So its still a good move to use the Heloc as down payment + conventional loan for a rental?   

I'm in a similar situation. I love the diversification that stocks provide so I try to avoid touching that pot of money if possible. I love the HELOC as a short term solution to acquiring property before refinancing it out to rinse and repeat after seasoning. As others have stated, it's generally a better solution than hard money or private money. And its a way to leverage the equity in your home to generate a higher return (with greater, but manageable risk).

At the end of the day, it's all about the ROI you except to generate in all your buckets, and the risk you're willing to accept. I'm all about the HELOC though!

Originally posted by @Jason Ngo :
Originally posted by @Ashish Acharya:
Originally posted by @Jason Ngo:
@Ashish Acharya

Your heloc will have interest around mid 6%. if your cash is making more than that, use helco, if not use cash. 

It also depends on your life outside investing. what is Your emergency fund ratio need? Do you need immediate liquidity. 

If your are strictly looking at the interest rate, don’t use cash unless cash is giving You more return than what you are paying in the helco interest. 

Thank you for the great advice!  Its not part of the emergency fund.  I think I will use both to buy two properties.  So its still a good move to use the Heloc as down payment + conventional loan for a rental?   

Yeah, but remember, banks sometimes dont let borrowed money for the downpayments. So, clarify that with the bank. Good luck. 

Originally posted by @Frankie Woods :

I'm in a similar situation. I love the diversification that stocks provide so I try to avoid touching that pot of money if possible. I love the HELOC as a short term solution to acquiring property before refinancing it out to rinse and repeat after seasoning. As others have stated, it's generally a better solution than hard money or private money. And its a way to leverage the equity in your home to generate a higher return (with greater, but manageable risk).

At the end of the day, it's all about the ROI you except to generate in all your buckets, and the risk you're willing to accept. I'm all about the HELOC though!

Thank you for the advice Frankie!  I was just really concerned about having the heloc AND the conventional loan and paying double interest.  This is my first investment and I'm trying to get everything ready.  I must be looking at this all wrong since no one else seems to mind paying interest on both.  Can you help me understand and point me how to rinse and repeat "after seasoning"?  

Originally posted by @Ashish Acharya :
Originally posted by @Jason Ngo:
Originally posted by @Ashish Acharya:
Originally posted by @Jason Ngo:
@Ashish Acharya

Your heloc will have interest around mid 6%. if your cash is making more than that, use helco, if not use cash. 

It also depends on your life outside investing. what is Your emergency fund ratio need? Do you need immediate liquidity. 

If your are strictly looking at the interest rate, don’t use cash unless cash is giving You more return than what you are paying in the helco interest. 

Thank you for the great advice!  Its not part of the emergency fund.  I think I will use both to buy two properties.  So its still a good move to use the Heloc as down payment + conventional loan for a rental?   

Yeah, but remember, banks sometimes dont let borrowed money for the downpayments. So, clarify that with the bank. Good luck. 

Will do!  Thank you for the advice! 

Originally posted by @Jason Ngo :
Originally posted by @Frankie Woods:

I'm in a similar situation. I love the diversification that stocks provide so I try to avoid touching that pot of money if possible. I love the HELOC as a short term solution to acquiring property before refinancing it out to rinse and repeat after seasoning. As others have stated, it's generally a better solution than hard money or private money. And its a way to leverage the equity in your home to generate a higher return (with greater, but manageable risk).

At the end of the day, it's all about the ROI you except to generate in all your buckets, and the risk you're willing to accept. I'm all about the HELOC though!

Thank you for the advice Frankie!  I was just really concerned about having the heloc AND the conventional loan and paying double interest.  This is my first investment and I'm trying to get everything ready.  I must be looking at this all wrong since no one else seems to mind paying interest on both.  Can you help me understand and point me how to rinse and repeat "after seasoning"?  

Investors don't mind paying double interest if the numbers still work for them. I can still generate a 10% CoC return paying double in most circumstances because the deals I find are pretty good. However, I've made a long-term play were I like at my IRR over say a one to five year period which includes a sell or refinance and will usually do quite well even if the numbers are lousy for say the first 6 - 12 months.

"Seasoning" is just illustrating that the property is performing (e.g., being rented and covering your costs). Conventional lenders want to see this before they will allow you to refinance. The refinance allows you to pull money out of the property and pay off your HELOC, investors, etc. or lets you put that capital into another deal.