HELOC to buy STR's?

Question

Is it a bad idea to use a HELOC to pay the down payment for my first short term rental investment? And how do I factor that in the Cash on Cash return when analyzing properties? I'm still trying to learn all I can as I look for an opportunity to get my foot in the door to investing in vacation rentals.

Nathan M kiefer · Answer

Our rule for using our heloc is only if we can pay it back/off in 1 year. If we can't do that we don't do it.

Doing this keeps us balanced and has allowed us to purchase more properties as well as have a reserve when needed.

Matthew Kwan · Answer

You can always do a HELOC on you primary up to 90% LTV vs an investment property only up to 75% -80% where rates are also slightly steeper.

@Carlos Valencia @Albert Bui

John Underwood · Answer

I used a Heloq for the downpayment on a vacation rental. This worked well for me.

Dan Rowley · Answer

I've always thought investing via HELOCs were risky, and now only more so as the rates are typically adjustable and would not be very high.  For example, if you had bought some RE with HELOC funds a couple years ago and now have to service that debt at twice the rate, that could be really painful.  Also, read the fine print HELOCs terms can also be changed or terminated if the bank changes their mind.

Tyler Hill · Answer

Is it a bad idea?No.

How to underwrite HELOC in figuring COC ROI?Your HELOC payment is your amount invested. The interest you pay on your HELOC is your cost of money. The cost of money would be considered an expense. Your COC ROI = (Annual Revenue - Annual Expense)/Invested Amount.

Everybody's situation is different. Know your risk tolerance and understand the situation you are putting yourself in. HELOC's are a tool and can be VERY beneficial. But as some have said, they can turn around and bite you if you're not diligent. HELOC's should be short term debt only. Understand the terms of that HELOC because they all have slight differences.You're totally asking the right questions and you are on the right path!

Chris I. · Answer

Also be aware that HELOCS are almost always adjustable rate. I got one in 2019 at 4%, today it’s at 8.5%. But my numbers still work so it’s ok.

Andrew Steffens · Answer

You can definitely do this.  It may be difficult to find a cashflowing property depending on the interest rate, but it is definitely possible.  Keep in mind you are liening your residence on an investment which is risky.  If you find the right deal and it makes sense, you are using OPM (other people's money) so it can be a great idea!

Sarah Kensinger · Answer

A HELOC is one of the most popular ways for someone to get into real estate. So long as you have a plan to repay it quickly, I would say to go for it! When underwriting some people would have the first mortgage listed and then a 2nd mortgage...the HELOC..., while others would take both payments add them together and list it as the mortgage.

Jon Martin · Answer

That's how I got started. The only caveat I would add is that you should be able to make the payment out of your day job salary, ideally with a bit of principal on top of that.

Michael Baum · Answer

Hey @Ryan Marble, it is something that you can do no problem, like the others have said.

Regarding figuring out your return, take some time and look at all the listings that would be similar to what you are planning on AirBNB and VRBO.

Look at their nightly rates, occupancy and amenities. Maybe use AirDNA for a specific area if you are really interested. Check out Awning.com's AirBNB estimator - https://www.awning.com/airbnb-estimator

It is free and can augment your data.

HELOC to buy STR's?

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