Kickoff a BRRRR with heloc?

Question

Although I'm new to real estate investing, I've bought and renovated a couple primary residences.   Now I want to get to the promised land and cut my day job.

3 years ago I bought a vacation home near Cape May, nj for 155k(cash), put in 60k in rehab and just got a cma for 268k.   Yah!!!  53k in profit!  But, we're emotional attached to this property so not interested in Airbnb or renting it....  But I'm thinking hard about how to leverage the capital in the house and kick off a BRRRR.

What do you think about getting a heloc on this house and then treating the funds almost like a private lender to myself.   Once I'm through to refi step in my BRRRR, I'd return the money to the heloc until the next deal and then repeat.

Seems like I could do this for n houses and I'd only have to pay interest on the heloc as holding costs until I got a tenant and refi on each rental.  Hopefully earning equity on the rehabs along the way, so I would be using a smaller and smaller portion of the heloc over time(or being able to go for larger duplex/multi fam properties)...

Does this make sense?  What am I not thinkng of?  What am I risking if I do this? And how would you mitigate it?  Are there other alternatives besides heloc and cash out refi?

Thanks in advance!

Tucker Cummings · Answer

I just did this on a property that I own, bought outright for 77k on Monday last week, valuation came back on Tuesday for 124k, 80% HELOC gives me a 99.2k buying power. There are no closing costs and if I draw down at least $2400/year, the maintenance fee is waived. Even if I don't, the maintenance fee is only $99/year. When the HELOC is not in use, I cash flow $900-$950/month. When I do use it, interest rate is 4.5% and it is a variable rate, but I can lock it into a 20 year fixed rate mortgage whenever I want.

Like you said, I am able to act as my own private money lender and I wouldn't have to solicit money when I find a deal. Not to mention I have very strong cash flow and it helps balance the debt in my portfolio. I can use my monopoly money aka fake money aka HELOC to create real, cash flowing assets.

Happy to share even more about it if you would like. As a final note, I would highly recommend putting a HELOC on the house. This is one of the best financial decisions I've ever made.

Steven Skarupa · Answer

So talked with a banker who is also an investor with 22 rentals...  He said it is virtually impossible to get a heloc on a free and clear properties right now and is trying to get me into a cash out refi at 2.75% instead.  At only ~600/month seems almost as good as a heloc and I talked to my investment broker who said he's got an ultra safe home for the money with between 2 - 3 % return.   So it seems to be almost the same thing as a heloc.

I consider this banker one of the first members of my core 4 and he's been mentoring me as I jump into the deep end, but even then do you think I should shop some more for a bank that offers a heloc?

Whitney Hutten · Answer

@Steven Skarupa You can continue to shop. Just know with each credit pull, you will need to document to the bank why it's on there.  Not a huge deal, just be careful.  I just had 3 clients do large HELOCs... I think it depends largely on where the property is and what the bank think will happen there.  Banks are reducing their balance sheet risks right now.

Whitney Hutten · Answer

@Steven Skarupa Using a HELOC is a great way to start.  The only catch is you are then locked into seasoning periods until you can refinance out.  I was able to accelerate growth when I learned how to use HML and PML responsibly.  Yes, it can cost, but it might mean the difference between 2-3 projects a year and 10+.

Steven Skarupa · Answer

Thanks for the feedback everyone.  Next stop: find and talk to a banker.  Going to want to take out the heloc and get pre-approved for a theoretical cash out refi.   Want to know if I find a reasonable deal, I can jump in quickIy.  Thanks again!

Lee VanDenBroeke · Answer

@Steven Skarupa I just bought my 7th property in 3 1/2 years. Every single one I purchased with my LOC, sold 3 and kept 3, and plan to keep this last one as my 4th rental.

My bank loans me 80% of appraised value after rehab, and so far I own the first 3 rentals for no money out of pocket after the refinance.

No downside for me so far.

Good luck!

Paul Shannon · Answer

BRRRR strategy without high cost of debt?  Use it when you need it, don't pay interest when you don't? What's not to like.  Hard money is great if that's your only options, but it cost 3 times what you'd pay if you borrow from yourself instead.  Its a nice option to have.  Find a lender than will give you a line of credit against it and roll.

Frank Hinck · Answer

@Steven Skarupa

People do BRRRR with the intention to flip but don’t want to pay Cap Gains so take a HELOC out, use to buy next property, refinance #2 then pay off #1 after 1’s year anniversary

Kickoff a BRRRR with heloc?

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