Understanding the numbers of the deal - when using HELOC

[Dave Smith]

This is a cash buy from a seller. He is motivated, and the numbers look good, but I can't get my head around the impact of using my HELOC. Also need to understand the Quit Claim deed. Purpose is rental for eventual refinance, then BRRRR. The particulars of this little 1/1, 500 sq ft. house:

Sell price: $3000 (no kidding) Structurally sound, not lived in for 15 years - he always planned on fixing it up and now he's 81 and must sell).  C neighborhood.

Repairs/holding costs: $17,500

All in:  $20,500

Rent comps: $445

CoC return: 10.7%

1% rule:  2.2%

Actual cash flow:  $183/mo

It's 100 years old, so I'm factoring into my expenses10% Capex, 10% ongoing maintenance. My 50% exp rule is at $223, and proforma at $240, so pretty close.

Instrument:  He wants to quit claim deed the property.

Using HELOC funds at 4.99%

1.  At face value, the deal looks good, except do I factor in the cost of the money I'm using?  If so, does this put me in negative cash flow?

2. If not, will I be able to refi after 6 mos, with the HELOC affecting my DTI ratio?

3.  If not, how do i unlock my capital to get to my next deal?

4.  Am I looking at this properly?  Should I be considering break even?  What are my options?

Any assistance would be greatly appreciated.  Thank you.

[Terry Owens]

Dave,

1. You most definitely need to consider the cost of using your HELOC. But once you re-fi, you pay your HELOC back and either close the account or use it again. I love this example of making money work for us/you...

2. You should have your exit strategy figured out before you make the purchase.  

3. Will you be able to get a re-fi? If not, you'll just pay your HELOC back, but you can't use it again until you have it again :)

4.  Don't forget to include taxes and insurance in your analysis.

If you break even...I suppose you can take the appreciation. What is the market value after rehab? It really depends on your investment criteria. Decide where to draw the line in the sand. For me, I don't buy a SFR unless it will bring in $200/door. Multifamily...$100/door