How to use HELOC to buy third property

Question

Hey everyone,

I’m a young investor currently sitting on two properties that have seen some solid appreciation lately. I’m itching to scale up and get my third deal under contract, but I’ve reached the point where my personal savings aren't enough for the next down payment.

I know "using your equity" is the standard move here, but I’m a bit fuzzy on the actual execution. I have a few specific questions for those of you who have done this:

How do I actually calculate my usable equity?

I know the properties are worth more than when I bought them, but how do I get a "real" number without paying for a full appraisal right away? Is there a standard percentage (LTV) that lenders usually let you pull out?

What do the Loans look like?

Would the new properties loan be similar to putting no money down on a property? If I bought a $100k property, and put 30k down on it using equity (20% down and $10k for closing) would the loan appear to be for $100k, all at the same interest rate?

How do I get pre-approved using equity?

If I don’t have the cash sitting in my bank account yet, how do I show a lender I’m "good for it"? Do I need to close the equity loan before I even start looking for the next property, or can it happen simultaneously?

I’d love to hear how you guys structured your first equity pull to jump from two properties to three. Any pitfalls I should watch out for?

Thanks in advance for the help!

Frank Pyle · Answer

Good questions. The simple version is most lenders will let you borrow against a portion of the current value, so usable equity is usually value minus current loan balance minus the lender’s max CLTV, and you can ballpark value with recent comps before paying for an appraisal. The HELOC or cash-out gives you the down payment and closing costs, then the new purchase loan is still written against the new property based on its own price and terms, not as one blended loan. For pre-approval, most lenders either want the HELOC already in place or they’ll underwrite both together if timing is clean. Biggest pitfalls are overestimating value, not accounting for the HELOC payment in your DTI/DSCR, and tying up too much equity without enough reserve cash.

Matthew Bernal · Answer

You are definitely thinking about the right strategy though using equity is how many investors move from a couple properties to building a larger portfolio. Are both of your current properties rentals already or was one originally a primary residence?

Gavin Wynn · Answer

This does help, and I pretty much figured that it would be about impossible to find a property that would cash flow given my circumstance. Thank you

Nicholas L. · Answer

@Gavin Wynn

i can simplify.

if you're proposing using a HELOC for the down payment + a loan for the rest, yes, it's possible, but you will just be losing money every month, because no property will be able to support that much debt.  properties mostly don't cash flow at all right now, even with down payments in cash.

sometimes investors do what you're proposing, and just pretend the HELOC interest isn't associated with the property it was used for.  this doesn't make sense.  it is.

on the other hand, HELOC money can be used for short-term purposes, like in a BRRRR.

hope this helps

Corby Goade · Answer

This is exactly how I started my portfolio as a college student and teacher- as you can imagine, I wasn't exactly rolling in cash...

HELOCs are portfolio loans, so they aren't beholden to Fannie and Freddie rules, though many lenders use those same guidelines.

You should be able to find a lender who will do a HELOC up to around 90% LTV on a primary. Some go up to 75% on single family investments. It can be a challenge to find lenders who will do HELOCs on non-owner occupied multifamily, and if you do, expect 60-65% or so.

The biggest challenge you'll have is LTV- you are essentially borrowing 100% of the cost of the new property which makes your payment higher. You will need to have high income to support the LTV. Many investors forget this part- the equity is just one piece of the puzzle, lenders need to know you can afford to make your payments.

Yes- get your HELOC first, then start shopping for property. The lender on the new property will be able to calculate your liabilities including the HELOC and get you approved that way, it'll be the simplest path.

The biggest stressor to this strategy is having reserves if you need a major repair- it's a means to an end, but the first few years can be lean and stressful as you build up cashflow and equity, but it's worth it.

Best of luck!

Stacy Raskin · Answer

Generally lenders will let a borrower pull out up to 75% LTV of the appraised value. This is either for conventional / DTI loans or DSCR loans. The value will be based on the actual appraisal. If you want to estimate you can look at sales comps in your area that are the most similar and located the closest to your property.

The loans will be if let's say, the appraised value is $250,000 and you want a 75% LTV then the new loan would be for $187,500 (75% of the appraised value). If done as a DSCR loan the underwriter will base on the actual rents if a refinance or a if a purchase it will be based on the actual rents or the projected rents from the appraiser's rent survey. If a conventional loan, it will be based on your personal income and debt to income ratios.

Generally the lender will want to see if you have the funds accessible through an open HELOC before they do a purchase loan. You don't have to have drawn the funds yet from the HELOC but they want to see that available. This will vary by lender especially if for DSCR loans as those guidelines vary by lender. If doing a cash out refinance, it will depend on the exact situation. Most investors will close on the cash out refinance and have the cash available for the down payment for the next property.

If you're considering a DSCR loan, here's more information about those. DSCR loans won't use your income or debt to income (DTI) ratios to underwrite the loan. DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. Here's a bit more in detail about how rates are calculated for DSCR loans:1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs. I've included an example below to help illustrate this.So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.See example below:DSCR < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals. Happy to connect to discuss further.

How to use HELOC to buy third property

How do I actually calculate my usable equity?

What do the Loans look like?

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