Using a HELOC for a Rental Property in Austin

[Kelly Stanton]

We are considering purchasing a rental property/townhome in Austin and wanted to know if it would be a good idea to use a HELOC? We currently own a 3BD 2 BA in Austin and have a decent amount of equity in it. We are eyeing an investor friendly townhome in East Austin that does not have any rental restrictions. We would likely turn this property into a MTR.

[Jay Hurst]

Quote from @Kelly Stanton:

We are considering purchasing a rental property/townhome in Austin and wanted to know if it would be a good idea to use a HELOC? We currently own a 3BD 2 BA in Austin and have a decent amount of equity in it. We are eyeing an investor friendly townhome in East Austin that does not have any rental restrictions. We would likely turn this property into a MTR.

 @Kelly Stanton Are you asking about using a HELOC to buy the property with cash? or, are you asking about using the HELOC for the down payment then financing the rest?

[Kelly Stanton]

@Jay Hurst Sorry I should have clarified, we would use the HELOC for the down payment and finance the rest.

[Jay Hurst]

Quote from @Kelly Stanton:

@Jay Hurst Sorry I should have clarified, we would use the HELOC for the down payment and finance the rest.

 @Kelly Stanton You can do it as long as your debt to income can handle the new HELOC payment as well if doing a full doc loan. However, you are leveraging on leverage which can be risky. Ideally you have a way to pay back the HELOC pretty quickly so you would have equity in the property you are buying. Also, HELOC's typically are adjustable rates based on prime and prime will continue to go up the rest of this year as the fed moves up the fed funds rate. So, you want to account for that in your cash flow numbers for the property you are looking to purchase because you need to account for all the leverage on the property to make sure it really cash flows.

[Jordan Moorhead]

@Kelly Stanton I wouldn't use a HELOC as a down payment because it's variable rate debt. For something like a BRRRR they're great because you can quickly pay it back

[Kelly Stanton]

Great insight, thank you both.

[Conner Olsen]

Quote from @Kelly Stanton:

We are considering purchasing a rental property/townhome in Austin and wanted to know if it would be a good idea to use a HELOC? We currently own a 3BD 2 BA in Austin and have a decent amount of equity in it. We are eyeing an investor friendly townhome in East Austin that does not have any rental restrictions. We would likely turn this property into a MTR.

Very similar to Jordan's comment, it's a little risky to do a HELOC for a down payment unless you're confident in the numbers. I was just talking to a guy who did that and was expecting $300/month in cash flow, then interest rates went up and he's -$100/month and can't sell the property without a loss. It's a risky strategy but can work if it's a homerun deal.