Rental Property Investor · Oakland, CA · Member since 2016 · 602 posts · 250 votes
Hi BP,
I am trying to explore an idea about HELOCing my current home to buy rental properties. Has anyone on BP done this before and what are the inherent risk I should be aware of before processing with this creative financing strategy?
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
9y
My first four unit was purchased using a HELOC to help fund the down payment. I wouldn't say there are any huge risks as long as you can afford the larger mortgage payment on your primary residence. You essentially get to borrow your equity for historically low interest rates, and then park that equity in a cash flowing asset. This worked out well for me!
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
9y
My first four unit was purchased using a HELOC to help fund the down payment. I wouldn't say there are any huge risks as long as you can afford the larger mortgage payment on your primary residence. You essentially get to borrow your equity for historically low interest rates, and then park that equity in a cash flowing asset. This worked out well for me!
Rental Property Investor · Ocala, FL · Member since 2016 · 226 posts · 140 votes
9y
I do that myself sometimes to help buy a house.. Then I fix up whatever needs it, make it look nice and like new.
After it is done, I get a 30 year mortgage on it, and can pull out almost all of the money I have in it.
Then, I pay back the HELOC, and let it be available for another property.
If you can buy at a good price, this can be a good strategy. I would not just let the HELOC stay in place, if I were you, since it is secured by your residence. It is better to use it on a temporary basis, and be sure to have an exit strategy.
Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
9y
I use them for down payments, pay the HELOC back as fast as possible (can take 2-6 years) and then with the forced appreciation on the property I just bought, I can get a HELOC on that one or do a refi. Either way it's a great way to use money if you accept that interest rates will rise and if you buy rentals below retail prices.
Rental Property Investor · Warrenton, VA · Member since 2016 · 126 posts · 58 votes
9y
I am currently doing this now. The only risk is if you don't make the payments you lose your home, but the payment are normally interest only and are at very low rates so the risk is minimal.
Plus you're borrowing at low rates to (hopefully) get much higher rates of return. You should be able to refinance and get your money back to buy another one after as long as you play your cards right.
Augusta, GA · Member since 2014 · 1k+ posts · 1k+ votes
9y
I've purchased probably six of our houses with a small HELOC I took out. As Chris said, the payments are normally interest only and at very low rates so to the risk is minimal. I'm a very cautious investor so I've never paid over 50K for a house.
I could pay off what I owe on the HELOC today but I have no mortgages on these houses so the interest is handy for tax purposes.
Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
9y
My HELOC is an integral part of my REI. I've used it both for a down payment (once) and to buy an investment property with cash (twice). I also use it as an "emergency fund", so to speak. As in, any part of rent monies that I put aside for future vacancies/repairs/taxes/etc., pay down my HELOC balance. Then I use the HELOC for those expenses.
I like the flexibility of the HELOC. I can pay it down. Use the money again for another property. Pay it down, etc.
Investor · Honolulu, HI · Member since 2017 · 187 posts · 108 votes
9y
Does any of you get worried when you do that? I have one rental and want to use a HELOC for a down payment on another. But do any of you ever feel like by doing that you could get caught with your pants down (not literally)?
In preparation for something like this, how would you mitigate against any uncertainties?
Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes
9y
Chris, I have the same concerns. I have a rental property that has around 80k in equity and am considering a HELOC to use to purchase another. It's scary, but I'm digging through these threads to measure the risk and get some confidence before I pull the trigger. My understanding is that for an investment property you need around 20% down, so my HELOC would help with that but would probably not cover the whole 20%.
BP has been a huge help to my education!
Contractor · Staten Island, NY · Member since 2016 · 147 posts · 38 votes
9y
@Michael Rodrigues if you use the HELOC to pull the 80k out and let's say that covers the 20% down payment for an investment property. Doesn't your mortgage bill increase?
Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes
9y
@John Spina jr as far as I understand a HELOC is just a credit line based on your equity, a refinance is where your mortgage would increase if you are refinancing on a higher value based on the equity increase. That is the 2nd option I'm considering, a cash out refi, which would potentially raise my mortgage (new 30 year loan based on appreciated value), but I'd take the cash difference out to use for my next property. So my 245k property currently has a mortgage based on the initial purchase price of 185k. Mortgage payment would go up, but I'd have that equity difference cashed out to use at will.
A HELOC would be keeping my same mortgage, but using the HELOC to fund my next property purchase, my understanding is it is a low risk loan where you are only paying the interest for some time. Then you can pay it back down and reuse the HELOC for the next time.
Contractor · Staten Island, NY · Member since 2016 · 147 posts · 38 votes
9y
@Michael Rodrigues so a refinance would be you taking a new loan on the appreciated value of 254k, this give you the difference of instant equity of 60k for another investment. Would that be correct?
Also the HELOC would give you a separate line of credit that essentially matches your current equity. This does not effect your current equity but is a separate loan that is based on your current equity. Then you would make the payments on the HELOC, until you refinanced the the investment property to pay off the HELOC and let the cash flow accumulate. Would that be correct as well?
Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes
9y
@John Spina jr yes, again I'm still learning so I might be off and don't want to give false information so this is purely my understanding. A refi would give me a new 30 year mortgage loan based on the current appraised value, so 245k or whatever it appraises for, thereby increasing my mortgage payment, but I would be able to "cash out" my current equity of around 60-80k to do whatever I want with, aka put it towards my next rental purchase.
HELOC is basically a loan for my current equity (I believe up to 75-80% LTV), which I can use like a checking account or credit card, to also put down toward my next rental.
I can then refi my current rental and use the cash out to pay down the HELOC, I think. Again- I am still learning this stuff as I go so someone please feel free to correct me! I just posted a new thread asking which way I should go, because it almost seems like going the HELOC route and then refinancing to pay it down doesn't seem much different than just a refi and using the cash...
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
9y
That's how we fund almost everything we do, including buying rentals. I'd suggest you read up on delayed financing. If you pay "cash" in full for your rental by using your heloc and you purchase well with built in equity, you can fully cash out including closing costs immediately.
Contractor · Staten Island, NY · Member since 2016 · 147 posts · 38 votes
9y
@Michael Rodrigues ok that does sound about right I don't think your too far off. Thank you for clearing that up I understand how they both work better now. I wonder then what is the better method to use. I wonder is there a limit to how many times you can get a HELOC? and how is it better or worse than a refinance? If anyone knows for sure I'm curious to know.
Homeowner · Orem, UT · Member since 2014 · 25 posts · 11 votes
9y
@Corby Goade have you been able to get a HELOC on a non-owner occupied Property? I'm getting different answers from others. I plan to visit some CU's to inquire.
Rental Property Investor · Concord, NC · Member since 2016 · 1k+ posts · 3k+ votes
9y
I like the strategy and have used a home equity loan maybe 8 times to fund purchased of SFRs. Application process was easy (Pentagon Federal Credit Union), interest rate was around 3%, my W2 job helped expediate the payoff and my 401K was a backstop if things really went south. Also allows you to bid and close with cash.
Rental Property Investor · Philadelphia, PA · Member since 2015 · 180 posts · 66 votes
9y
Corby Goade Terrell Garren
Pen Fed credit union will do Helocs on properties 1-3 even if non owner occupied. I have not done this myself. I was told by one of their operators that they only do this for properties in your name, not in your business name.
Hope that's helpful!
I am trying to explore an idea about HELOCing my current home to buy rental properties. Has anyone on BP done this before and what are the inherent risk I should be aware of before processing with this creative financing strategy?
I've used my HELOC to buy about 7-8 homes. It's a great way to extract capital from your primary home equity and use it to acquire cash flowing properties.
this is a FANTASTIC method for people who live in California or coastal areas which have increased in value/appreciated. This way you are utilizing this equity that is just "dormant" inside your primary home and activating them by acquiring rental properties that MORE money for you.
In addition, since we are near the peak of the market, it makes sense to transfer your equity to places that have more linear cycles so that even if there is a recession you won't have the volatility that you have in California.
If you don't have enough reserves, then be careful but if you have reserves, it's one of the best way to accelerate acquisition.
Lastly, ALL of your HELOC interest will be tax deductible (even above the $100,000 amount) so you get a tax deduction on the heloc interest which is fantastic.
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
9y
@Garrett M., thanks for the heads up, I will check in to that. @Michael Rodrigues, I have not been able to get a HELOC on a rental property, only cash out refi.
Investor · New Orleans, LA · Member since 2014 · 1k+ posts · 944 votes
9y
I think some of this has been answered, but a HELOC has no effect on a mortgage payment, ie the first lien. A HELOC's monthly payment is variable, depending on the current balance.
Another important note to keep in mind. HELOC's are generally a 10-year amortization period. So the monthly payment will be HEFTY, compared to a similar real estate loan with a 20 or 30-year amortization.
I still think they're the best thing since sliced bread! The flexibility of this product is stellar.
As my property value has increased, I've "upped" the limit for my HELOC twice. It was a new loan and underwriting process each time; however, I've always used the same bank. Have a great relationship with them. So it was a fairly quick and easy process each time. They were mainly just interested in the 3rd party appraisal report to justify raising the line.
Beverly, MA · Member since 2017 · 3 posts · 0 votes
9y
Is obtaining a HELOC on an investment property more difficult that obtaining a HELOC on your primary? If so, what are the additional hurdles with underwriting?
Does any of you get worried when you do that? I have one rental and want to use a HELOC for a down payment on another. But do any of you ever feel like by doing that you could get caught with your pants down (not literally)?
In preparation for something like this, how would you mitigate against any uncertainties?
Thanks!
I guess one mitigation would be to not use all of your HELOC so you have some wiggle room. That way you could essentially pay the interest on the HELOC with money from the HELOC? Not a good way to build wealth and will put you in more debt, but it could help if you had a few bad months here and there.
Corby Goade Terrell Garren
Pen Fed credit union will do Helocs on properties 1-3 even if non owner occupied. I have not done this myself. I was told by one of their operators that they only do this for properties in your name, not in your business name.
PenFed is advertising 80% HELOC for an investment property. I gave them a call. Didn't tell the rep that I planned to use it for a downpayment of another property, but she did say "these are for improving the current property only". Has anyone ran in to issues with this-- or do you just go ahead and use the funds for another property?