Leveraging your HELOC to BRRRR

Troy, NY · Member since 2016 · 108 posts · 29 votes

Hi!

I have a scenario i would like you all to weigh in on. My partner and I took our a HELOC on our homes. Keep in mind, our personal homes are not making any money. We used the HELOC funds to buy a SFH all cash. The SFH needs minimal upgrades. We will STR / MTR the SFH to bring in revenue. There is a local bank willing to give us a loan on the SFH to take out our original investment. With those funds, we will place a down payment on a larger multifamily home. Essentially we are financing our down payment from the loan we are using from the SFH which was financed from our personal HELOCS.

Does this leave us too exposed / levered? Is this more risky than a typical BRRRR as we are starting with the equity built in our personal homes that dont bring in revenue?

Thanks!

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Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

@Donald DiBuono We need actual numbers to understand how much leverage you're using. If you and your partner didn't force any appreciation on the primary residences you could be over leveraged like @Nick Belsky was hinting at. It's just robbing Peter to pay Paul. In my opinion in a round about way (HELOC) you're just spreading the love and thinning your equity. It's strategy no doubt but it's risky for newer investors..

I'm in the same boat and none of my properties cash-flow at full 75% LTV. I don't think it's been mentioned but these higher rates are killing most BRRRR deals. We're about to finance out of our current SFH remodel. We won't get all our money back out, and will end up around 65-70% LTV (BRRRR'ish). It's the only way to cash-flow right now and retain equity for future growth. We're trying to lever less at this time. Something to think about before pulling as much cash as possible.

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Nick BelskyBusiness Member
Lender · Orlando, FL · Member since 2021 · 1k+ posts · 704 votes
3y
@Donald DiBuono
Curious as to why you'd use HELOC funds to purchase an investment with all cash? Wouldn't using only the minimal portion needed to purchase with a positive cash flow, then use the remaining funds to do the same with multiple properties been a more efficient use of the funds? Especially, if you planned to purchase more properties.
Have you done any rehab to the SFR you purchased or was it turnkey? You should be able to do either delayed financing to pull up to 80% of the amount you've spent on it, if going conventional. If looking at private funds, you could get up to 80% of the amount you've spent as well, assuming it will cash flow. If you did rehab, you could get up to 80LTV on the new appraised value, depending on what state you are in and if the DSCR will support it. This all depends on when you purchases and seasoning requirements from lenders as well.
Many investors use HELOC funds to get started in BRRRR investing, but try to spread it out as much as possible so large portions are tied up in equity. The worry of being over leveraged mostly applies to conventional borrowers. Private money doesn't even look at your DTI or care if you are employed, in many cases. There are many different strategies and approaches available. Working with a mortgage broker would be very beneficial to you to help maximize the funds/equity you have available so you can scale.
Cheers!
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Donald DiBuono
OP
Troy, NY · Member since 2016 · 108 posts · 29 votes
3y
We used the HELOC as the property was off market and needed to be paid for in all cash. We did some upgrades to the property and will be taking 75% out of the appraised value that will give us back our initial investment. Where we struggle is we want to use those funds to then put a down payment on a larger multifamily, but are we over leveraged at our personal homes that we used the HELOC through arent producing income?

@Nick Belsky
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William HalickPro Member
Investor · NJ | PR · Member since 2014 · 39 posts · 9 votes
3y
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
@Donald DiBuono We need actual numbers to understand how much leverage you're using. If you and your partner didn't force any appreciation on the primary residences you could be over leveraged like @Nick Belsky was hinting at. It's just robbing Peter to pay Paul. In my opinion in a round about way (HELOC) you're just spreading the love and thinning your equity. It's strategy no doubt but it's risky for newer investors..

I'm in the same boat and none of my properties cash-flow at full 75% LTV. I don't think it's been mentioned but these higher rates are killing most BRRRR deals. We're about to finance out of our current SFH remodel. We won't get all our money back out, and will end up around 65-70% LTV (BRRRR'ish). It's the only way to cash-flow right now and retain equity for future growth. We're trying to lever less at this time. Something to think about before pulling as much cash as possible.
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Donald DiBuono
OP
Troy, NY · Member since 2016 · 108 posts · 29 votes
3y
Quote from @Jaron Walling:

@Donald DiBuono We need actual numbers to understand how much leverage you're using. If you and your partner didn't force any appreciation on the primary residences you could be over leveraged like @Nick Belsky was hinting at. It's just robbing Peter to pay Paul. In my opinion in a round about way (HELOC) you're just spreading the love and thinning your equity. It's strategy no doubt but it's risky for newer investors..

I'm in the same boat and none of my properties cash-flow at full 75% LTV. I don't think it's been mentioned but these higher rates are killing most BRRRR deals. We're about to finance out of our current SFH remodel. We won't get all our money back out, and will end up around 65-70% LTV (BRRRR'ish). It's the only way to cash-flow right now and retain equity for future growth. We're trying to lever less at this time. Something to think about before pulling as much cash as possible.
I can give you real numbers. We are collectively using 150k. We both bought our primary homes and rehabbed them. Instead of selling, we took the equity out. We purchased the SFH for 150k. We will spend ~10k in rehab costs and it should appraise for 210k. This will allow us to take out our 150k investment. We plan to STR / MTR the property as it came fully furnished. We will then use the 150k new loan on the SFH to partner on a 990k 9 unit building. We will be responsible for 50% of the down payment. Does this help?
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
@Donald DiBuono That's great man! It's very helpful and opens the door to more questions.

How are you valuing the property you bought for $150K? From my experience a $10K rehab budget is pretty slim... not questioning your numbers but it's slim. A new roof for a SFH is easily $8-12K depending on the size and slope. We blew through $16K in like 15 days remodeling our current property and our rehab total was $25K and I swang a lot of hammers. If you bought well below market then kudos to you! MTR is appealing and that's a good idea if the location justifies it.

Going from SF to a $1M apartment is a massive jump. REI is a long journey not a sprint.
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Donald DiBuono
OP
Troy, NY · Member since 2016 · 108 posts · 29 votes
3y
Quote from @Jaron Walling:

@Donald DiBuono That's great man! It's very helpful and opens the door to more questions.
How are you valuing the property you bought for $150K? From my experience a $10K rehab budget is pretty slim... not questioning your numbers but it's slim. A new roof for a SFH is easily $8-12K depending on the size and slope. We blew through $16K in 30 days remodeling our current property and ended up at $25K. If you bought well below market then kudos to you! MTR is appealing and that's a good idea if the location justifies it.
Going from SF to a $1M apartment is a massive jump. REI is a long journey not a sprint.

We did buy at a steep discount. It was off market. Just needed a clean out & paint. We have done a few flips and have some duplexes. I feel confident in the management of the new building, just worried we are over levered.
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Jonathan R McLaughlin
Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
3y
is the new buildings cash flow greater than the heloc debt?
Is the heloc debt fixed?
A purchase like this should help your debt ratios/decrease your leverage not increase it.
1) primary residence debt (including heloc)/your income= debt ratio now
2) add new building debt / your income +75% of income from building= debt ratio after purchase
3) #2 should be a better number then #1
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
Agreed with @Jonathan R McLaughlin and that's a big deal. They usually use 75% of your total reported income. If you're clean out & paint property is bridging that 25% "gap" I don't see how you're over leveraging. The only thing that could hurt this deal is the appraisal (ARV). Sounds like you know the market. Even if the appraisal came in $10K less you could pull less $$$ and make it work.
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