Evergreen, CO · Member since 2017 · 91 posts · 22 votes
I'm considering buying a note or two with a HELOC. Although I'm generally leaning toward secured 1st position NPNs, it seems like a PERFORMING note (either a 1st or 2nd) would be the best way to leverage it.
As long as the spread between the cash flow on the note and the interest on the HELOC makes sense, this is a no-brainer right?
Any reason not to throw a HELOC on a note?
won't you have to pay back your HELOC on a monthly basis? How are you going to manage the cost of buying the Note, such as, foreclosure costs (if any) or loss mitigation, boarding the note, serviced fees, etc. I've had some NPN that took a couple months to workout so can't count on monthly payments until you find out what's going on with the borrower.
Depends on the HELOC you go with. The ones I've looked at so far have interest only due during the draw period, say 10 years. And then a 20 year amortization period. I'm currently looking at this as well. For performing notes I would keep the term short if you have a floating rate HELOC. No telling where interest rates will be 10-15 years from now and your spread could get eaten up over time investing I fixed rate instruments with floating rate debt. So I'm looking at using a HELOC for partials and NPN. Yes, you'll have interest to pay during the workout, but assuming a successful trade you have the ability to repay the principal in a matter of months. Rinse and repeat.
I too have been looking into this but i really dont like the idea of leveraging. I rather use OPM, which i actually did do for this last NPN i purchased. So far everyone is happy ;)
Daria B.
The benefit of using a performing note would be that it is performing. So, unless it becomes nonperforming, it should be pretty straightforward and there wouldn't be any workout or FC costs, for instance.
But, as Jordan P. mentioned, the longer terms associated with a performing note could close the spread. An NPN or partial makes some sense in that regard.
Varinder Kumar
I really like the idea of using OPM too but I don't see why anyone would lend to me at 6-8% when they could buy the note themselves and get 12-15%. Are the terms of your deal much different than this? Help me see the value here.
the reason why is because you know notes and they don't. My strategy is different I'm not cashflowing I'm simply buying and selling g the property for profit. I'm giving 10% interest only payments for 12 months, secured by title of home. Example $20k purchase @10 per cent = 2000 for 12 months interest only monthly payments of $166 a month, if they can get better returns in other markets then be my guest.
Thanks for the last link Kelly Byrd .
I'm also considering using the HELOC to lend to a HML as Dave Van Horn suggested. I'll look into institutional notes as well.
I'm considering buying a note or two with a HELOC. Although I'm generally leaning toward secured 1st position NPNs, it seems like a PERFORMING note (either a 1st or 2nd) would be the best way to leverage it.
As long as the spread between the cash flow on the note and the interest on the HELOC makes sense, this is a no-brainer right?
Any reason not to throw a HELOC on a note?
As long as you pull or have additional capital for reserves to cover potential servicing/insurance/taxes/foreclosure fees and have a plan to exit the HELOC when interest rates climb (which they will ) so your HELOC is not costing you more than the note, that should work fine.
I've sold partials to investors who use their HELOCs and so far so good, but just make sure you have enough spread for the arbitrage and assume your interest rate on that HELOC will rise.