HELOC Primary Home for Down Payment?

Question

Is it wise to take a HELOC on my primary home to for the downpayment for a short term rental property? I would have the HELOC as well as mortgage to pay. What are the pros and cons to this approach?

The HELOC would be a variable interest rate, correct?

Clayton Silva · Answer

For everyone saying yes or no, the actual answer is it depends.  What is your exit strategy?  What is your current loan amount on your primary?  What is your current interest rate on your primary?  How much would you be tapping into on the HELOC? Is the HELOC adjustable or fixed.  All of these would need to be answered and plugged into a blended rate calculator to determine if it makes more sense to cashout refinance or use a HELOC.  We help clients answer this question all the time as it comes up a lot these days.

Ray Williams · Answer

It depends. Honestly. What is your equity position? Do you have the financial capacity to absorb payments while you get the STR optimized? HELOCs are based off Prime + a margin. We are at the top of the current rate cycle, so this is a healthy time to analyze if it makes sense for you. As once they start reducing the Fed Funds rate, prime will come down and so will interest costs on HELOCs. You'll want to learn about the ins/outs of any HELOC you take as they are not built the same. As example credit unions can be great, though I have had many clients where the payment is 1% of the borrowed amount. I see this as a disadvantage. I like 30 year terms, with 10 year interest only, and 20 year repay. I can use it, then refinance it down the line. Hope this helps to begin for you.

Sean O'Keefe · Answer

@Vinny Incognoli pro -> if you use the HELCO on primary to invest in STR you can take a tax deduction for HELOC mortgage interest on rental.

Nathan Gesner · Answer

Your equity is not a savings account from which you can withdraw for free. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEYou cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).

Key Numbers

• Home Equity Loan Interest Rate: 6%
• Mortgage Interest Rate: 7%
• Rental Income: $3,000 per month
• Expenses (management, taxes, insurance, maintenance): $800 per month

Income and Expenses

• Monthly Rental Income: $3,000
• Monthly Expenses: $800
• Monthly Mortgage Payment: $2,000

Explanation

• The investor earns $3,000 in rent each month.
• They pay $2,000 on the investment property mortgage and $800 on other expenses.
• This leaves $200 profit each month or $2,400 per year.
• However, you have to pay $6,000 interest on the equity borrowed.
• This leaves you with an annual loss of $3,600.

This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.

Nathan Gesner · Answer

I think you misunderstood. They won't charge interest until you borrow against the equity, then you pay interest on the amount borrowed. For example, your credit card could have a line of credit up to $25,000 but you don't pay anything as long as your balance is $0. Charge $10,000 to the card, and then you'll have to pay interest on that $10,000.

Brian Barch · Answer

It depends.  Is it costly?  Yes, but that doesn't make it bad if it unlocks future profits for you.  I would use the minimum I needed to make the STR successful, and have a backup plan if the STR lost money.In other words, this might be best suited for someone with a big W2 shovel, they just don't have the full downpayment built up yet, but if they ran into future issues or slow STR months, their W2 could cover it (and the HELOC payment).Also, you have to really research your STR investment first to be almost certain it will profit.  But STR investing can be fickle over a SHORT TERM horizon.  I remember when people were doing whatever they could to buy a rental cabin in Blue Ridge GA near me.  So many gold rush stories.  Two years later and that market is down 30% while costs are up.  What seemed like a great investment 2 years ago would be a poor one now......which is why you need to go in with a long term horizon in mind.

Sarah Kensinger · Answer

Many many investors have started with a HELOC on their residence, but with a plan on how to pay it back quickly. For many myself included, it was about the only way to get into real estate without waiting until we're 70. Then we would only afford a dump due to the rising cost of real estate and value of money dropping.

Sarah Taylor · Answer

If the numbers work it can be a great way to get started in REI. Just make sure you factor in all costs and find out if your heloc allows rate locks and interest only payments.... the goal would be to pay off HELOC ASAP and then use it again to invest in the next property....

Vinny Incognoli · Answer

Thank you for the response. Would a better option be to use the HELOC to purchase the short term rental in full with no mortgage?

HELOC Primary Home for Down Payment?

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