Financing my first deal - HELOC & Cash

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Financing my first deal - HELOC & Cash

Curtis BrownPro Member
Member since 2020 · 7 posts · 1 vote

I'm just starting out in my real estate investor journey and have been learning all I can from various books, podcasts, and people. My wife and I have a 30-year fixed-rate (2.87%) VA mortgage with about $80k in equity. We recently applied for a HELOC and, if approved, will have an $80K line of credit. The processing time for our HELOC is going to be about 90-days and the lender said our credit line can go up if we put more equity in our home before closing. We also have roughly $64k in cash (it's parked in a high-interest savings account). I am thinking about putting the $64k into the principle of our current mortgage to increase our HELOC to about $144k prior to closing - this would make the HELOC our only means to invest with. The appeal to this approach is we will be able to pay off our mortgage in 11 years versus 30 years and save over $30k in interest. The real estate investment method I'm leaning toward is BRRRR but I am open to finding good deals on homes that need minimal effort to become rent ready. Do you see any drawbacks to putting all of our cash into our mortgage and relying solely on our HELOC to get started in real estate investing? Thanks in advance!

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y

Yes, I see draw backs, @Curtis Brown. That is not a good idea. With your mortgage at such a low rate it makes no sense to pay it down faster with cash. You're basically proposing to pay down your mortgage (at 2.9%) so you can give the bank the privilege of lending that money back to you at ~6%. Of course, your bank said you can increase your credit line this way!

Additionally, the bank can decide to close your HELOC for reasons completely out of your control (like a global pandemic that plunges the economy into the largest recession of our lifetimes).

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    Yes, I see draw backs, @Curtis Brown. That is not a good idea. With your mortgage at such a low rate it makes no sense to pay it down faster with cash. You're basically proposing to pay down your mortgage (at 2.9%) so you can give the bank the privilege of lending that money back to you at ~6%. Of course, your bank said you can increase your credit line this way!

    Additionally, the bank can decide to close your HELOC for reasons completely out of your control (like a global pandemic that plunges the economy into the largest recession of our lifetimes).

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  • Curtis BrownPro Member
    OP
    Member since 2020 · 7 posts · 1 vote
    6y

    Thanks! @Jaysen Medhurst

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  • Nick Ferrari
    Property Manager · Allentown, PA · Member since 2017 · 88 posts · 40 votes
    6y

    I disagree with Jaysen Medhurst.  I have done exactly what you described and have had a great experience with it i'll give you the bullet points as to why I agree with your philosophy.

    1.) You are paying down a significant amount of interest in terms of dollars over the life term of your loan.  So if you're paying 64K against the principal and subtracting 30K in interest that's a significant savings when looking at it holistically. 

    2.) You are shortening the lifeterm of your primary mortgage which for most average Americans is the largest expense we pay for so you have a higher chance of fast tracking yourself to retirement or financial freedom.

    3.) You are creating your own financial instrument by leveraging your home with a HELOC. Now it is true there are risks like a recession the bank could close a line of credit. However that's being stated by the writer above almost as an inevitability and for the rest of time. The reality is there are many banks offering HELOC's that you could switch to if this were to happen and in a worst case scenario wait it out a few years and then try again. After all there's no reason why you couldn't try again... it's your primary mortgage were talking about it's not going anywhere and neither are HELOC's.

    4.) HELOC's generally speaking are a very cheap form of capital. Most HELOC's are around the 4-5% Variable rate (currently) and historically are below 8% with only a few points in the last 50 years going above that and with a coming recession generally speaking interest rates typically go down and if you're worth your salt as your investor literally one homes profit in a given year could pay for any interest accumulated.

    5.) If you believe in Robert Kiyosaki's principals of converting liabilities into assets then simply put paying down your mortgages principal and converting that into your small businesses bank account with a HELOC is in theory converting a liability into an asset.

    It's very easy for people to simply say no that's a terrible idea we for some reason have this terrible stygma associated with paying down principal and then leveraging that equity to your own advantage, personally i've never understood why I think it's a brilliant move one that I can tell you has worked extremely well for me.

    I'll leave you with item to ponder on.  Tell me, what risk do you have by paying down your principal (debt)?

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  • Curtis BrownPro Member
    OP
    Member since 2020 · 7 posts · 1 vote
    6y

    Nick,

    All good points. One risk I see with having all my cash in equity is me not BRRRR'ing correctly (i.e. my ARV doesn't appraise well and my cash out refinance doesn't cover all of my costs). My concern is I'll have a balance on my HELOC that I won't be able to paid off immediately. If I have my cash on hand and my cash out refi doesn't recover all of my costs, then I'm not stuck paying interest on the credit balance.

    Also, HELOCs don't typically allow people to borrow against 100% of their equity. This could my options in terms of homes I could afford. What are your thoughts?

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  • Nick Ferrari
    Property Manager · Allentown, PA · Member since 2017 · 88 posts · 40 votes
    6y

    @Curtis Brown

    Apologies for the late response this one got lost in the weeds. You do raise a fair point in that banks don't allow you to borrow against 100% some do 80% some allow up to 90% (typically leveraged at a slightly higher interest rate) so you could mark that in the cons of the HELOC column. I suppose you would have to look at it holistically for your own personal situation and weigh the pros and cons. For what i'm trying to accomplish the pros far outweigh the cons and I think that if you're using the investment strategy mentioned prior that would be true for most people but just because it works for me doesn't mean it works for everyone.

    To answer your question regarding getting your money back on the BRRRR ask yourself this, would that not be the same situation if all of your money was sitting in a checking account and then your ARV didn't appraise well? A HELOC is simply a method of financing which is one of many components to a successful investment strategy for RE.

    Let's say you're afraid of getting stuck with the interest well almost assuredly overtime you will make some money on the property even if it's not the greatest investment property you'll probably get some cash flow out of it which overtime will replace your initial capital investment or if it truly is a terrible investment you could sell it to get out of that situation.  I think it's important note that you're starting to play the "What If" card which is a slippery slope of negativity.  I could give you thousands of examples of what could go wrong and all of them could happen.  

    My goal here is to explain the benefits of an underlooked investment strategy that has a bad name but what I believe is an effective form of financing for deals.  Certainly do whatever you think works best for your business though.


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