Rental Property Investor · Montville, NJ · Member since 2014 · 82 posts · 10 votes
Hi,
My family member has a 250K HELOC that they are allowing me to use to invest in real estate. Would it be in my interest to use it to buy, say, a $200,000 property in cash, and then immediately refinance? I would want to buy and hold, or BRRRR. Do people do this kind of thing? I'm not so familiar what the steps are to do that, or the detailed mechanics. I'm looking to cash flow $150-$200. My realtor says that's pretty doable more west than Northern NJ and also in parts of South Jersey.
Lenders go by the appraised value of the property, and lend you 70-75% of it's value.
In order to do a successful BRRRR and cash out on all your initial capital, you need to make sure you can renovate and increase the value enough so that it meets this "rule", and you can get most if not all your money back and to pay back the HELOC.
If your property appraises for 100k, most lenders will lend up to 70k-75k.
I put the word rule in quotes because different lenders have different guidelines, but if you are looking for a conventional bank product like a 30-year fixed rate loan, Fannie Mae has their guidelines on how much they can lend up to. (and bank money is the cheapest out there)
You will want to buy a property that is under market value and do some renovation to increase the value, so when you refinance, you will be able to get your initial capital back. Most lenders on the refi will allow 70-75% LTV, so if you cannot get an appraisal high enough, you will not be able to cash out your initial investment.
So say your purchase and renovation, you spend 250k, the appraisal will need to be at $357k or higher to cash out everything, or else you will have money in the deal.
@Amul, I and my cousins have done this routinely. Write a check from HELOC so you can use cash option (and make your deal more attractive to seller) and then go through refi when property is ready. You don't want to be in HELOC forever though as rate is fluctuating so you should use it for short term bridge financing.
@Amul Sutaria, I believe you asked this question 5 years ago too. Is there anything that you’re hearing that gives you pause?
HAHA, i actually did. At that time I wasn't very serious about RE, and my family member wasn't really ready to help. Now i got those two in line and I'm ready to pull the trigger. I now own my own home, have a 7 month old... but wanna start moving toward ending the 9-5....
You will want to buy a property that is under market value and do some renovation to increase the value, so when you refinance, you will be able to get your initial capital back. Most lenders on the refi will allow 70-75% LTV, so if you cannot get an appraisal high enough, you will not be able to cash out your initial investment.
So say your purchase and renovation, you spend 250k, the appraisal will need to be at $357k or higher to cash out everything, or else you will have money in the deal.
Thanks Michael. Can you explain in more lay terms what you mean by "most lenders on the refi will allow 70-75% LTV?
Lenders go by the appraised value of the property, and lend you 70-75% of it's value.
In order to do a successful BRRRR and cash out on all your initial capital, you need to make sure you can renovate and increase the value enough so that it meets this "rule", and you can get most if not all your money back and to pay back the HELOC.
If your property appraises for 100k, most lenders will lend up to 70k-75k.
I put the word rule in quotes because different lenders have different guidelines, but if you are looking for a conventional bank product like a 30-year fixed rate loan, Fannie Mae has their guidelines on how much they can lend up to. (and bank money is the cheapest out there)
So if i understand you correctly, if the property appraises ARV at 100K, i probably would have had to buy it 65K (lets say 10k in reno), thereby getting my HELOC and reno costs back from the lender, who will lend me 75K
I wouldn't do it unless you got a good deal, remember the banks going to let you refi up to 80%,also the property has to be rented out for 6months prior. if I were you I would aim a little lower with price jus incase any unexpected repairs and cash reserves
@Londell Reedman, property doesn’t have to be rented for 6 months for seasoning requirement. Property must have been purchased for 6 months and be rented.