feedback needed - HELOC strategy

7 Replies

I plan on getting my first rental property soon and was wondering if my strategy on getting subsequent rental properties would work:

- Get first rental property, prep, rent out

- After a year or so depending on how things pan out with first rental property get a heloc on first rental and use it towards second then repeat first step...etc..etc

Am I on the right track?

You could do that, but - in my opinion - if the money you'll be pulling out of the paid off properties will be going towards buying long term rentals then you'd be better off going with a cash out refi so you can lock in the low fixed rates.  HELOCs are variable rates and could go up during the time that you're holding the rental, thereby eating into your profits.

I think that is a decent strategy using a cash-out long-term financing vs. HELOC.

If you don't get substantial sweat equity or save up for increased money to put towards the 2nd property, then you will have to buy cheaper and cheaper properties.

If you start with a 200K property - you could buy a 150K property then a 112K property. You would end up with a total property value of 462K and a LTV of about 56% - which should be a reasonable balance. You would have mortgage payments with about $1000 a month for interest.

If you save about 20k/year you buy a 150K property in year 3.  By year 4 you should be getting some significant rental income that may mean you can save up more quickly and buy around the 150K level until you use up conventional financing opportunities.

Apart from using a heloc - do I have any other options?  

My strategy will be to use cash and some of my HELOC (from my home) as a down payment. Properties in MA are extremely expensive, so if I want to keep buying, 100% cash down won't work but on maybe 1 property. My plan is to take the NOI of the property and instead of paying down the principal on the mortgage, it'll pay down the HELOC until it's 100% paid off. Then I'll buy the next property and so on and so forth...Once I can cash out refi some of my initial buys, I will most likely use more cash, but I'll look into that when I get there. Hope that helps.


Teo, my experience with a HELOC so far has been that they will not give more then about 80-85% of the appraised value (the bank will order an appraisal when you apply) so unless you have significant equity in the property then a HELOC may not work. If you buy a severely distressed property to start with (hard money or private money) and fix it up, then refinance it to a standard 30 year loan you may have some equity to tap into for the second one. My recommendation would be to refinance the property a second time after a year or so when you are ready as apposed to a HELOC and then roll that money into the second one. Consult your CPA but any cash out from a refinance should be tax free!

Also, when you are ready for your second property, why not take that experience and success and pitch it to a partner (family member, friend, etc) and offer an equity share in the property if they provide the needed up front funds?

The problem is where to get distressed properties? Wholesaler don't offer clear title

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