home equity line of credit for flip

8 Replies

I have some cash but not enough so I was thinking for getting a line of credit on my house which has a little equality to buy a house CASH and fix it and flip it... what do you guys think about getting a home equality line of credit to buy a house to do a flip? 

pros cons?

any suggestion?

I am basically doing the same thing. Not flipping but buying, repairing and raising rental rates for a buy and hold. The HELOC will be paid back with the increased rents.

If you're buying the house cash you wont have to worry about repairs the bank will require the seller or you to make in order for the house to close.

HELOC is a good way to go because it can be really cheap money compared to what people are paying hard money lenders.

The timeline for getting a HELOC for me was 30-45 days. This might be a problem if you have a house in mind that you want to buy. In that time someone else could come and snatch it up.

Also fees for the HELOC are pretty low but you will have to pay an appraisal fee for your current house which will be $400+.

Hope this helps.

HELOC used for flipping is a great idea in my opinion. I am currently combining a HELOC with hard money to conduct a flip. I have to do that because the prices here in Chicago are high enough in the good areas that my heloc would not provide me with enough cash to do it by myself.

As stated above make sure you start the process way i advance of when you expect to need it. HELOCS can take 3 weeks or can take 3 months depending on the bank. Im at 6 or 7 weeks with mine unfortunately due to underwriter delays.

Originally posted by @Susan Capeta :

I have some cash but not enough so I was thinking for getting a line of credit on my house which has a little equality to buy a house CASH and fix it and flip it... what do you guys think about getting a home equality line of credit to buy a house to do a flip? 

pros cons?

any suggestion?

 First, I think you mean EQUITY line of credit.

I personally think it adds to your risk.  IF your flip does not work out like you plan, if you run into unforeseen problems (see Occupants from Hell thread), if the rehab takes longer or if it does not sell or your market sees a steep decline in value the you get hit twice.

First your investment property does not pay off as planned and second your LOC lender keeps calling and asking for additional or larger payments ... or worse, forecloses on your personal residence to make good on the LOC at a time when the value of your residence and your investment property are low (underwater).

If lenders require additional equity in your investment property, look for another lender that will make a higher LTV loan OR look for someone who will partner with you on your investment property.

Good Luck

There is always risk but i don't believe it is anywhere as dire as what @Kevin Yeats detailed.

First of all in order for your HELOC lender to foreclose you will have to default on the loan. Given that most Heloc's are interest only for the first 5-10 years if you are in danger of defaulting then you should not be flipping in the first place. My heloc of 50K is costing me approximately $180 a month in interest. Even if my flip does not go well, that 180 a month is not going to cause me to default and i will have 10 years to pay it off before it switches into a fixed P & I loan (it helps that the HELOC in on an investment property and tenants pay the HELOC for me).

I personally think it is better to use the HELOC instead of a higher LTV lender. The HELOC is pretty much guaranteed to be the lowest interest loan you can get today (mine is 3.7%). You will have to pay the money back no matter what source of funds you use (lender or HELOC).

Also a partner is the most expensive option. It is a good option if you dont have the requisite experience though. However a 50/50 partner will cost you more money than a hard money lender. I recommend partnerships for those without the cash, experience or time. If i could get the cash from a HELOC and i had the deal, time and experience, i would do that instead of a partnership. (i am currently using a partner because i do not have time or enough experience. I do have the cash though)

The problem i have is ... the house is a single family house and i put a wall in between to separate the 2.. i dont want to bring the wall down.. i can bring it down anytime but i have some renters so i dont want to bring the way down.. the wall makes it 2 condos instead of a Single family...once again i can convert this anytime to single family...

now when the appraser comes and see it is not single fmaily is it going to cause my line of credit to be denied?  i have good equity in the house.. 

@Susan Capeta

Depending on the lender and the HELOC amount you want its highly unlikely the bank will actually send an appraiser out to you. I am not a banker but they are doing so many of these loans they crunch numbers, use software and maybe have someone do a drive by.

If there is good equity in the property based on your remaining mortgage and if they have any doubts they may restrict your LTV but I don't think all HELOC's come with a detailed inspection of the property. I have done 2 in the last 3 yrs. No one ever came to appraise my house.

My #1 rule for investing.  Never put your personal home on the line.  Especially if you have a family..

You are only in this business to make money not take risks like that.

If you are able to get a great deal on a property to flip you can just as easily find an investor/private money to fund the down payment and get hard money for the remaining amount.  Just need to go out and network.

Hi Susan;

If you are new to flipping I would tread cautiously and maybe look at some other alternatives to buying all cash that way you have more leverage and are not putting all of your eggs in one basket. Everyone's circumstances are different of course. I would be happy to speak with regarding any future projects.

Regards;

Jo-Ann Lapin