Use HELOC for STR down payment?

Question

I’m considering investing in short term rentals. I’ve been working on saving up a down payment for my first rental but curious about using a HELOC to take advantage of the equity in my primary residence for the down payment. What do others think of this approach? Is it better to just keep saving until I have the appropriate down payment? Thanks for the advice!

Ryan Moyer · Answer

Ironically since HELOC rates are based off of prime, they're actually far less crazy than fixed rates right now, and still have a long way to catch up before they get up to where fixed rates are.

Through all of this prime has actually only risen by 0.25.  It's still only 3.5.  But fixed rate loans are way up above 6 now.  I'm opening a HELOC right now for prime+0.09 which is 3.59.

Obviously that rate will continue to go up as the fed continues to raise, but fixed rate loans already have the next 8 fed raises priced in.  It will probably take a couple of years before prime gets up anywhere near where fixed rates are right now even in a worst case scenario.

Of course if you're planning on keeping the debt for 10 years or something, who knows where rates will be then.  But if someone is planning to pay it back in 1-3 it's unlikely that prime will catch up with even current fixed interest rates by then.

Marco Egurvide · Answer

Hey @Ryan Hampton I am doing the same thing. I was lucky enough to find a credit union close to me that offers 3 years of a fixed rate before becoming fully variable. I believe more due diligence is needed to make sure your numbers pan out so you can pay back the loan as much as possible before payments include principal as well. I think its not a bad play if you are planning a flip or BRR'STR'R* and the cash out refi can pay off that balance. I am still underwriting and looking for the property so I cannot comment too far past what I have already done. Good Luck!

Gerald Pitts · Answer

This is exactly how I got started, and it has proven to be critical to me getting in the game, and gaining momentum. Just watch the variable rates that might be crazy right now. You might also consider private money, and just pay that back asap.

Marshall Leipprandt · Answer

@Ryan Hampton I'm sure a lot of people are doing this now, but is it right for your personal situation is the better question? How much equity do you have to tap and how much of a down payment would you be putting on the STR? What rate would you get on the HELOC? How would you pay the HELOC off? What is your tolerance for risk?

You can always do a combination of using what you have saved and a HELOC if you wanted a little less risk. It also depends on where you are buying and whether you have a high level of confidence that the STR will be a strong and profitable investment to acquire in this current market.

Adam David Graning · Answer

@Ryan Hampton we’ve done it! It’s more debt pay down and less out of pocket. Your cash flow has to be really strong, but I wouldn’t do it any other way!

Julie Toh · Answer

@Ryan Hampton HELOC is often an under-utilized financial tool. To have the mindset of an investor is to leverage equity to generate wealth, of course, you got to calculate your risk and know your risk tolerance.

Ryan Hampton · Answer

Thanks everyone for your help!!

Corbin Loveless · Answer

@Ryan Hampton make sure your project will cash flow with the additional interest for financing your down payment. If you're investing based on cash flow and have confidence in your future rental demand, that will help mitigate risk. Don't let FOMO draw you into a deal that needs wishful thinking to make the numbers work. Be conservative. Tether yourself to sound investing criteria. Develop local relationships with people who are winning- collaborate and learn!

John Underwood · Answer

Yes I have used a Heloq for a downpayment.

Adam Sieg · Answer

Hi @Ryan Hampton - we've done this for a couple of our properties, they were for LTR but kind of the same idea.  It worked well and once we refinanced we were able to pay off the HELOC and just start over.

Use HELOC for STR down payment?

Most Popular Reply