Should I use a HELOC to buy an investment property?

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Should I use a HELOC to buy an investment property?

Brett Chandler
Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes

Hey there! My name is Brett. I have been doing some research in the articles and forums here. This is my first post. I have some questions and ideas about how to get into the investment property game. I’m hoping that some of you experienced folks can offer some guidance, criticism, or just shoot holes in my plan. Let me start with a little background. I’m 32, married with 3 kids (7 months - 7 years), living in the Portland, OR area. I’m a public employee, eligible to retire in 2040. My goal is to build up a portfolio with a handful of rentals by the time I retire to create passive income in retirement to either enjoy, give away, or reinvest to create generational wealth. 

I have some construction background and am fortunate enough to have a work schedule that would allow me to buy a distressed property, flip, and hold. That will be my primary means of investing in the future. I won’t have the time to commit to that for 5ish years (when all the kids are in school). In the meantime, I’m looking at investing in something more “turnkey”. 

My thought is to take out a HELOC on my home (150-200K), and use it to pay "cash" for a 150k condo (150-200k single family homes don't exist in this area without the need for significant TLC). Then, I would use the rental income to cover the HELOC payments and aggressively pay down the principal with my own contributions. Once I have the HELOC at a zero balance, I would repeat the same process, but more quickly with the added rental income of the first unit. Then rinse and repeat until I have the time to commit to a rehab.

Well, that post ended up being a bit longer than I meant for it to. Thanks for hanging in there with me. I would really appreciate any feedback you have. Thanks!

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James Palassis
Easley, SC · Member since 2017 · 74 posts · 64 votes
7y

I just used the "delayed financing" strategy with my first buy and hold. Used HELOC funds to make a cash offer, paid for rehab with HELOC. I am now refinancing out of it. It has been a smooth process, although if I were to do it over again, I'd like to figure out a way to avoid paying closing costs twice (once on cash purchase, again on refi). My numbers looked like this, but keep in mind this is my first so I made some mistakes along the way...

Purchase price: $65000

Rehab: $10000

Signed lease for $875/mo

Refinance w/ amount financed at $50000 (I could have gone higher, but don't mind the equity and it cashflows well at this amount)

Appraised at $90000

So my out of pocket is $25k on a property worth $90k and generating $875 in rent. 

If you're doing HELOC then cashout refi, there is no "seasoning period" where you must hold the property before you're able to refi.

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  • Alain Labrada
    Miami, FL · Member since 2017 · 15 posts · 6 votes
    7y

    Hi Brett,

    Let me start by saying the I haven't done that myself ever, I'm also new in REI. However, I have been reading about this same topic because I'm also looking at a way to finance my next property.

    Why would you pay cash for only one 150k property when you could buy 3? The total cost of buying a 150k property is around 40k (20% down + closing costs) Whatever cash flow you calculated will the triple with 3 properties.

    0Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    7y
    Originally posted by @Brett Chandler:

    Hey there! My name is Brett. I have been doing some research in the articles and forums here. This is my first post. I have some questions and ideas about how to get into the investment property game. I’m hoping that some of you experienced folks can offer some guidance, criticism, or just shoot holes in my plan. Let me start with a little background. I’m 32, married with 3 kids (7 months - 7 years), living in the Portland, OR area. I’m a public employee, eligible to retire in 2040. My goal is to build up a portfolio with a handful of rentals by the time I retire to create passive income in retirement to either enjoy, give away, or reinvest to create generational wealth. 

    I have some construction background and am fortunate enough to have a work schedule that would allow me to buy a distressed property, flip, and hold. That will be my primary means of investing in the future. I won’t have the time to commit to that for 5ish years (when all the kids are in school). In the meantime, I’m looking at investing in something more “turnkey”. 

    My thought is to take out a HELOC on my home (150-200K), and use it to pay "cash" for a 150k condo (150-200k single family homes don't exist in this area without the need for significant TLC). Then, I would use the rental income to cover the HELOC payments and aggressively pay down the principal with my own contributions. Once I have the HELOC at a zero balance, I would repeat the same process, but more quickly with the added rental income of the first unit. Then rinse and repeat until I have the time to commit to a rehab.

    Well, that post ended up being a bit longer than I meant for it to. Thanks for hanging in there with me. I would really appreciate any feedback you have. Thanks!

    I would refinance the investment property to pay off the HELOC right away. This way you can do it all over again faster. Just realize that the most you'll get back from the condo in your example is 70% if the refi is done within 6 months and 75% if done after six months. You don't have to take back the 105K or 112.5K (70% or 75%) as you can do a smaller loan amount if need be. I would just make sure you're cash flowing and then leave the home alone. I would also say to make sure your work funds can pay down the HELOC aggressively after the condo refinance. So, you take out 80K and now you owe 70K on the HELOC. Make sure you have a plan in place to pay that 70K aggressively.

    I would also consider just doing a cash out refinance which is my preferred method. You won't have to worry about rising rates and the cash is in the bank and ready to take a property down at a moment’s notice.

    I hope this helps and have a good one.

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  • Brett Chandler
    OP
    Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes
    7y

    @Alain Labrada thanks for the response. I was wondering how long it would take for someone to ask that question ;)  Yours is a strategy that makes a lot of sense mathematically.

    For me, the answer is more personal than mathematical. I don't want to extend myself to the point that I can't afford to pay for all of my liabilities on my monthly income. I also feel more comfortable getting my feet wet as a new investor than completely jumping in, so to speak. Another thing is that if I was going to finance with 20-25% down, the property might not even cash flow. With the interest only HELOC, I would be able to avoid financing costs and the more aggressively I pay down the principal, the more it cash flows and the faster it's paid off. I may be way off base here, that's just how it works in my head.

    1Reply
  • Brett Chandler
    OP
    Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes
    7y
    Thanks for your input. That plan makes sense. I do like the sound of freeing up my HELOC availability. It seems like going that route would effectively mean that I was using the HELOC for the 25% down payment plus whatever principal reduction to make the property cash flow. If I was going to do it that way, I would probably use conventional financing with the HELOC as the down payment. Is there any benefit to using the HELOC for the purchase instead, aside from being more attractive to the seller as a “cash buyer” and is that worth it for the 6 month holding cost of the HELOC? 
    As far as the cash out refi, my equity is in the form of a 400k debt on a 600k home. My understanding is that a cash out refi would put me into jumbo loan territory and would have me glued to an even bigger mortgage payment for the next 30 years as opposed to having a condo paid for in a few years with the HELOC. I wish there was one right answer. I’m not afraid to get after it, I just want to make sure I’m doing it the right way. Thanks again for your insight! 
    0Reply
  • Brett Chandler
    OP
    Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes
    7y

    @Shaun Weekes thanks for the response. I couldn’t tag you in my reply, but you can see it ^up there^ if you’re interested. Thanks again!

    1Reply
  • Shaun Weekes
    Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
    7y
    Originally posted by @Brett Chandler:
    Thanks for your input. That plan makes sense. I do like the sound of freeing up my HELOC availability. It seems like going that route would effectively mean that I was using the HELOC for the 25% down payment plus whatever principal reduction to make the property cash flow. If I was going to do it that way, I would probably use conventional financing with the HELOC as the down payment. Is there any benefit to using the HELOC for the purchase instead, aside from being more attractive to the seller as a “cash buyer” and is that worth it for the 6 month holding cost of the HELOC? 
    As far as the cash out refi, my equity is in the form of a 400k debt on a 600k home. My understanding is that a cash out refi would put me into jumbo loan territory and would have me glued to an even bigger mortgage payment for the next 30 years as opposed to having a condo paid for in a few years with the HELOC. I wish there was one right answer. I’m not afraid to get after it, I just want to make sure I’m doing it the right way. Thanks again for your insight! 

    Both ways work but I would just make sure you can take care of the HELOC. A lot of people get used to the minimum payment and then at the 10 year mark, boom the payment triples and it's hard to recover unless you were ready in the first place.

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  • Brett Chandler
    OP
    Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes
    7y

    @Shaun Weekes Fair enough. My plan would be to kick that HELOC to the curb ASAP, but I can see how that could bite you if you hit the repayment period and haven't touched the principal yikes!

    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    7y

    @Brett Chandler sounds like a good plan to me. You are safer and with the very likely possibility of a dip in values I’d take my time. Leverage works with an uptrend but is aweful when prices drop. 

    0Reply
  • James Palassis
    Easley, SC · Member since 2017 · 74 posts · 64 votes
    7y

    I just used the "delayed financing" strategy with my first buy and hold. Used HELOC funds to make a cash offer, paid for rehab with HELOC. I am now refinancing out of it. It has been a smooth process, although if I were to do it over again, I'd like to figure out a way to avoid paying closing costs twice (once on cash purchase, again on refi). My numbers looked like this, but keep in mind this is my first so I made some mistakes along the way...

    Purchase price: $65000

    Rehab: $10000

    Signed lease for $875/mo

    Refinance w/ amount financed at $50000 (I could have gone higher, but don't mind the equity and it cashflows well at this amount)

    Appraised at $90000

    So my out of pocket is $25k on a property worth $90k and generating $875 in rent. 

    If you're doing HELOC then cashout refi, there is no "seasoning period" where you must hold the property before you're able to refi.

    1Reply
  • Alain Labrada
    Miami, FL · Member since 2017 · 15 posts · 6 votes
    7y

    @James Palassis, 

    I'm trying to learn so I ask a lot of questions. 

    Can you explain to me the refinancing part? Are you refinancing a loan of $50,000 only? If this is the case, your plan is to pay back part of the HELOC with the 50k and the rest with the monthly cash flow? Why you did not refinance for an amount that will let you pay off the HELOC entirely? Is it because by doing that you won't have any cash flow?

    Thanks!

    0Reply
  • Sachin Amin
    Columbus, OH · Member since 2018 · 164 posts · 126 votes
    7y

    @Brett Chandler

    Hello Brett yes it would work, I am the example I took up HELOC and bought 2 multi units and rented them for a year, I used the rents to pay the HELOC for about 9 months ... did some improvements when tenants were gone , got new tenets and sold the properties with 40% capital gain, the HELOC is paid off and I have 40% more capital now to repeat the same..

    Best of luck with your first venture

    Sachin

    0Reply
  • James Palassis
    Easley, SC · Member since 2017 · 74 posts · 64 votes
    7y

    @Alain Labrada my comfort level is 50% equity in my properties. I realize this will inhibit fast growth, but we all have different goals. Our primary is paid off and we have positive cash flow from our W2 jobs, so once the $50 refinance comes in the HELOC will be paid off and we'll be ready to repeat. I guess it's just a more conservative BRRRR approach. Best wishes on your investing!

    0Reply
  • Mathew Wray
    Real Estate Agent · Portland, OR · Member since 2013 · 412 posts · 219 votes
    7y

    Hi @Brett Chandler...been out of town for a few days and catching up. 

    One thing to keep in mind is that having a condo as an investment is not the same as a SFR or a multi-family. I know the price points are lower and that is super attractive, but there are some drawbacks as well. Besides the obvious of HOAs (just as an aside, don't shop based on the HOA fee), their fees and management, you have some danger zones down the line as well. Condos typically drop in value first, and faster, than other properties. If enough in a complex are foreclosed on you can lose the ability for a buyer to finance in that complex so you could get stuck with an asset you have to deeply discount to unload. There are more concerns than just those...just want you to consider information as you formulate your plan.

    Best of luck, 

    Mathew 

    0Reply
  • Brett Chandler
    OP
    Investor · Gresham, OR · Member since 2019 · 39 posts · 15 votes
    7y

    @Mathew Wray good thoughts, thanks for the feedback! I've spent some time researching and coming up with a plan to ‘present a case' to my bride. She basically said ‘you're smart, but we're not doing that'. Looks like we'll just be saving up to start on our BRRRR in a few years. It kills me to waste that precious time building up our portfolio, but it beats being single ;)

    0Reply
  • Johnny Situ
    Rental Property Investor · Fort Mill, SC · Member since 2014 · 161 posts · 132 votes
    7y

    Hi @Brett Chandler I don't think using HELOC for investments is an issue, I have been investing all my HELOC for buying cash flow investment properties and it works out great. You can check out my story as well, it could be inspirational for starters: https://www.biggerpockets.com/forums/223/topics/671473-9-rentals-1-startup-while-having-a-w2-job-and-raising-2-kids

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  • Mathew Wray
    Real Estate Agent · Portland, OR · Member since 2013 · 412 posts · 219 votes
    7y

    I understand completely! My agreement with my wife is we don't touch the equity in our home either...get it paid off. 

    In the meantime, there's other ways to get in the game, make some extra money, partnerships, etc. The whole point of earning real estate wealth is to live a good life so what's the point of ruining a relationship over it! Your time will come! 

    In the meantime, just keep educating yourself!

    Good luck!

    Mathew

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