How do I make sense of a Home Equity loan?

Question

I roughly have about 150k-175k in equity on my duplex that I owner occupy. I have talked to a few loan agents and can't make sense of how an equity loan would help. My initial duplex loan would go up (because they would combine my current mortgage with my equity loan amount) thus canceling my cash flow from my duplex. I want to buy a new investment property, I'm just struggling to get my second property (mostly interested in multifamily). I need help figuring out how use the equity. Any good thoughts or suggestions would be greatly appreciated.

Jason G. · Answer

I have no intention of leaving my primary for some time to come and when I do I plan on renting it out, so I do not believe having the HELOC on it will change anything.  I used a national bank.  Shop around and look at who has the best terms.  If you have a lot of equity in your primary and your DTI is favorable, it is unlikely you will have any trouble getting one whether it be from a credit union or a major bank.  With respect to paying it back, I haven't paid it back in full, but as we saved for the next down payment I would put it back into the HELOC so the monthly payments would go down until we were ready to pull out the money for the purchase and have just kept repeating that.  But with the 100k fully used, that is the amount the current monthly payment is.  Later this year I'm going to see if I can upgrade the HELOC to around 350-400k.  I was scared of over leveraging at first but now after purchasing five investment properties I've gotten a lot more comfortable with leverage and I think it will be the easiest way to scale up very quickly.

Larry Turowski · Answer

@Chris Redford First, I would recommend a home equity line of credit (HELOC) over a home equity loan.  There are generally no or minimal closing costs with a HELOC and you don't pay any interest if you aren't withdrawing any money.  If you get a home equity loan of say, $100K, they'll actually give you the $100K and you'll start making payments on it.  With a HELOC, you get an account with $100K credit from you can withdraw funds.  If you don't need them right away, you don't withdraw and so you don't pay interest.

Second, yes, you'll be paying more in principal and interest on your primary duplex if you get a HELOC and use it.  But you'll be making money on the your new rental.  Assuming all the terms are the same, your total payments for your primary duplex and the new rental would be the same regardless of whether you borrow against your primary duplex or the new rental.   In other words, if you are going to borrow $100K, what difference does it make which property is used as collateral?

Pathik P. · Answer

I appreciate the quick responses @Jason G.

Yea, I know I'm going to be getting less than preferable rates with commercial loans, higher downpayment, and differences in refi %. But at the end of the day, it'll be about scaling versus pure margins on a single property. I just want to make sure I get down my understanding of different strategies out there, and lock down my strategy to reduce as many surprises as possible when we officially start buying.

And got it! Yea that makes sense. Would your strategy then be to scale as much as you can each time you reset the HELOC to 0? Or just use it as it becomes available from paying it down?

Jason G. · Answer

1. BRRRR is a viable strategy for many, but it depends on the investor's individual circumstances.  A HELOC is for a primary residence.  A LOC is for a rental property.  You will likely run into difficulty obtaining a conventional mortgage with an LLC and interest rates, down payment percentages, and refinance retention percentages will likely be less favorable with non conventional loans.

2. A portion of the rental income covered the monthly interest payments.  I used money from my day job to pay it down.  It is about halfway paid off at the moment.

Pathik P. · Answer

@Jason G. Makes complete sense! And I'd go about it the same way. We're also BRRRRing.Buy our first property with money set aside for downpaymentRehab from money set asideRent to tenant based on fixed up propertyRefinance --> This is where we could either cash out refi or HELOC on equity (75% of LTV) to recapture costs andRepeat --> keep growing. On third property, do cash out refi or HELOC again to quickly pay down first HELOC2 questions:1) Is that a viable strategy?2) The 100k HELOC you fully took out, how did you go about paying that down? Rental income?

Jason G. · Answer

Every month I had been paying down my primary residence and my wife and I were also putting aside money for down payments on rental properties.  We took the money set aside to pay for the downpayment for the 1st property, then used a combination of the HELOC and money we were setting a side for the next three properties. At that point the 100k HELOC was maxed out and we used money we were were putting aside for the 5th property.

Pathik P. · Answer

Hi @Jason G.I'm just getting into REI and will be planning to specifically get into Buying and Holding. If you don't mind, would you share how you scaled up to 5 properties in a year and a half? I believe my understanding is still lacking in this specific area - the creative financing. Unfortunately I don't have a property of my own yet to do any type of HE Loan or HE Line of Credit. I'm also going into this as an LLC so I'm sure that changes things a bit dealing with CU and banks, but that's separate. I'm just interested in learning the specifics of how you grew to 5 from 1.

Chris Redford · Answer

@Jason Gines Also, would you suggest local credit unions or online banks to get the HELOC?

Chris Redford · Answer

Jason Gines. Thank you for responding to me!

That is great to hear you have been able to acquire that many properties with the HELOC. that does put me at ease when it comes to using it. So you used it completely, then paid it back, then used it again and paid it back? That is a great idea! To have the HELOC, did you have to stay in the home you took the HELOC on for the life of the loan?

Jason G. · Answer

The HELOC interest payments are not that much.  I have a 100k HELOC on my primary and the monthly is currently at $466.  I've used it, paid some back, used it again, paid some back, used it again.  Between using the HELOC and saving for down payments I've been able to acquire five properties (all financed) in a year and a half.  Split between the cash flow from the properties the interest payment is easily covered and because the funds were used to buy investment properties, it is tax deductible.

How do I make sense of a Home Equity loan?

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