Last year I contacted my credit union and got a HELOC out for investing. It cost me a grand total of $250 and included an appraisal. I recommend that you begin the process now so that you have it ready when the time to strike presents itself. It should fund into a checking account and can sit there unused. You can use a check for your (EMD) Earnest Money Deposit and then another one for your down payment.
You probably already know, but you'll be allowed to take up to 80% LTV in most cases. This means that if your house is worth 100K and you have a mortgage of 45k, then the bank will approve you for 35k. 45 + 35 = 80. 80/100 = 80%
We have the HELOC and are also saving as much cash as possible. I highly recommend reading, the Richest Man in Babylon. Disponible en espanol ;) I'm of the mindset that a market correction is coming and I want to be correctly positioned to take advantage of it. I am also currently making offers, but at a price that protects me from any such correction.
@Kevin Lefeuvre I don't have any experience is with a "non-doc borrower" situation, so I cannot really comment. As for banks, right now I like Everbank and First Republic.
@Lee S. How did your research go? How did the HELOC work for you? Any recommendation?
I ended up getting a 95% ltv though state department federal credit union at 4%. I've already used to to rehab a couple rentals and then did a cash out refinance and paid off the heloc. One note, had a really low/bad appraisal on 2nd property and used that to negotiate a better rate and no fees with a 2nd lender if I switched and did a new appraisal through them. 2nd appraisal came back at the correct number (190k vs 157k on first appraisal) and it wasn't more than enough to get all my purchase/rehab money out of the house. Don't accept a bad appraisal If you know it's incorrect, it's an opinion find someone with a better opinion!
I'm buying a new primary residence for my family in the middle of July. One thing we applied for in the process along with our new home loan was a HELOC. My broker said it was completely free to do and the interest rate was sub 5%.
So I will have $35,000 in a HELOC once this loan goes through and everything is said and done. I had heard about being able to use it for literally anything I need it for, however I am going to be extremely conservative and reserve it for primary residence emergencies ONLY, or investing in something that will return me a profit allowing to pay off what I borrow.
I have a financial backer for another $50,000 in additional funds (potentially more) as of right now. My thought process was to do a BRRR strategy using the generated funds from the refinance to pay back the HELOC thereby replenishing the funds. Would this be a smart move? Or do you (any of you can please answer this) think I should consider other avenues?
My consecration will be Buy and Hold of single family residence and/or multifamily. With my end desire to be commercial acquisitions.
My experience with HELOCs has been great. I've done two so far. I didn't have much capital and after doing research on various forms of capital acquisition the HELOC was my best option. I bought a primary residence (condo) in 2013. It appreciated approximately 65k in 2 years so I decided to take a HELOC out on it (approximately 80k). I used that money to purchase a condo and rehabbed it (2016) with the intention to flip it. However, once I did the rehab, my wife and I loved it so much that we ended up moving into it. I ended up selling the initial one (2017), paid off the underlying mortgage and HELOC and walked away with about 80k in net proceeds. I used that 80k to purchase a SFR and Triplex just south of Chicago (my first out-of-state purchases; both set to close in early July). That essentially used up all my funds. So I decided to take a HELOC out on the condo I rehabbed and we moved into last year. I was able to get 90% LTV (see below on the appraisal issue) and take out about 80K. I plan on using that money to purchase 3 to 4 more out-of-state properties before the year is done. Also, that money is used to show banks that I have the requisite 6% in reserves as part of the Fannie Mae requirements. I plan on using the rental income from all theses properties to pay off the HELOC so by end of 2018 I will pretty much have none of my own money in any of the properties.
@Glenn D. Can you please clarify. You said you were able to get a HELOC on an non-owner occupied investment property in ND? Or was that your primary residence? I was under the impression that it is only possible to get a HELOC on a primary.
@Arlen Chou Where were you able to get a prime +1% HELOC? My local CU was only able to do prime +2% (at 90LTV).
@Thea Linkfield My HELOC just funded and I initially wanted a HELOC based on comps around 250K. I forced about 35k of equity when I purchased the place last year (158K). I expressly told the loan coordinator that they will need to do an appraisal based on the interior in order to get the 250K value. He told me it would be no problem. However, when the appraisal came in it was at 216K. He calls me and tells me the "bad news". I spend 10 minutes railing him for essentially misleading me. He proceeds to tell me that they only do 'outside' appraisals and that I can get another appraisal done (pay $600 out-of-pocket) but this will also delay the closing up to 2 weeks. I decided to just take 90% LTV at 216K rather than the 80% I wanted at 250K to close quicker. Theoretically I still have about 34K of equity on the table when I go to sell next year, so it really ended up protecting me from myself in case the market drops next year. Also, yes, you can wire transfer directly from your HELOC. I did that with 2 EMDs last month.
@Gerardo Varela HELOCs are great if you use them for the right purpose. Using the funds for non-investment type purposes can quickly get you in trouble financially if the market turns or if you don't have all your numbers in order. But say you can borrow the HELOC at 6% and parlay that money into something that gets you 10% returns, you should take advantage of that arbitrage.
@Zachary Clevenger I'm always of the philosophy to replenish the HELOC funds whenever possible. Since the interest rate is adjustable, and it will more than likely increase in the next 12 months, what you're paying on it today might be much different than at this time next year. If you don't account for that increase in your underwriting and don't replenish the HELOC, that may turn your project form profitable to negative cash-flow when the dust settles. Also, and I know 10 years is a long time, but you can typically just pay interest only on the loan during that time period. However, if you don't pay it off within 10 years, it will start amortizing over a 20 year period which means your payments will drastically increase. This is what caused people to lose their home 10 years ago when the market crashed. They used their HELOCs for frivolous vacations and car purchases but when the music stopped and all of a sudden their payments (in addition to their first mortgage) increased (maybe even doubled), they were unable to pay them off and thus had to foreclose.
Thanks for the information! I fully plan to use the HELOC solely for emergencies or investment opportunities only. I would prefer to pay off the HELOC and start fresh allowing me to avoid a future headache. I do not, nor have I ever, liked to accrue a lot of debt. And I agree on your statements of it coming back to haunt people....it happened to several people I personally knew.
@Eugene Rogachevsky that is correct. I have been able to get 2 HELOC's on two separate properties and neither of them were my primary residence. As a matter of fact I am working on getting another one very soon for a rehab project that is going on now.
This is how the HELOC was explained to me. The credit union does a drive by to get eyes on the property. They then use that and comps to determine value or they could opt to use an AVM only to determine value. If my credit is good then I could get 95%. So lets say my house came out to be $130K and I owe 101,542(93,842 mortgage + 7,700 previous HELOC) This is the math.
130,000 x 95% = 123,500
123,500 -101,542 = 21,958
my HELOC would be 21,958.
And yes you need to be very disciplined on spending it. I know, I'm on the payback time of mine. Money wasted on the wrong things and nothing to show for it.
When I got my HELOC years ago, my credit union threw 13k at me and a credit card and a check book to use it. And they threw as fast as they offered it to me, everything complete within 2 weeks I believe.
Hi all, so I wanted to clarify as I got a little confused reading all these posts. For example, let say I wanted to get a HELOC to start my investment journey through my personal home.
Let's just keep easy numbers here:
Value of home: 200k
Current mortgage on home: 130k
HELOC value if 80%: 200 x .80 = 160k
160k - 130k = $30,000 HELOC
I take this money and purchase an investment rental. Let's just say I paid 20k for the home and put 10k in the rehab = 30k. All HELOC money is now tied up in the rental and now appraises for 60k, but I owe $0 on the rental (well technically I do owe through the HELOC) So here's where I am confused.
Do I now get a cash out refinance = the homes new appraisal of 60k? Take that and pay back the HELOC of 30k (HELOC is now reloaded and paid off). Have an extra 30k to pay back on the cash out loan. Now let rental property pay for itself on remainder of loan? Rinse and repeat with HELOC?
@Doug Bish your math is correct but I think there might be an issue with the refi. I know you used those numbers for an easy example but lets just say those are true in your market. It'll be difficult to find a lender that will want to cash out refi at a low amount like 60k. They won't make any money on the front end through fees and what not since I believe they are capped at 3% max of the loan amount per federal guidelines. So you 60k refi @75LTV would be a 45k loan, which would essentially max out at 1,350 in lender fees. I doubt you'll be able to find a lender willing to do this. Thus, you might be stuck with a property you're 30k into, unable to refi and paying whatever variable interest rate your HELOC is at. Perhaps the better option would be to do that and then flip it to a retail buyer. you'll pay capital gains taxes but it might be a way to make a small chunk. Rinse and repeat that.
I just called my current mortgage holder, Citibank, and they informed me that I can get a HELOC opened for more money than I was anticipating, BUT that using that money for real estate was prohibited. Is this normal now? They are saying yes post housing crisis. Frankly, I'm not sure how they would know I was buying real estate if I'm off writing checks. Any advice here? Should I just keep calling banks? Thx
@Gerardo Varela It makes a lot more sense than leaving sterile equity buried in your property. But it really depends where you then invest.
Assume you took $100k out of your Home's Equity to use as a down payment on the house next door. Your home will continue to appreciate at the same rate irrespective of whether you took out equity or not. Now you could have 2 houses appreciating at the same rate - and the new investment being a rental would produce income and depreciation to cover most of the interest expense and other holding cost on the investment loan.
To ensure you can meet any shortfall in holding costs you should leave some undrawn cushion in the HELOC which you can draw on if needed. If there is a shortfall the IRS will make a contribution to help you out as the loan interest and expenses on the investment property will be tax deductible.
If you can drag out say $200k in the HELOC put a $100k deposit on both houses next door ... and over time as all 3 properties continue to appreciate increase your credit line to make additional investments. (Make sure to have investment protection using matched Equity Options - Puts to insure against market down turns)
That's the way I got started and it's been good so far. I was able to buy two homes and use the HELOC for the 20% down and repairs. If the market tanks I can always rent out my current house that I have the HELOC on and buy another property FHA if I needed to move that bad. I think it's a great way to invest.
This is an amazing thread. I've begun pricing out HELOCs and it's daunting. So many different rates. So far, I've found that Wells Fargo will give me a HELOC based on my investment property at Prime + 1.05 at a 100k HELOC. Can any one else share their recent rates?
Once you use your HELOC for a down payment is that counted against you when getting approved for a loan just before closing/settlement?
I would like to use the HELOC on a downpayment but am afraid once the HELOC withdrawn it will cause my Debt to Income Ratio to go up causing me to be unable to get final loan approval....
Joe Sillaman I was wondering about this, too. If you use a HELOC that you already have toward a down payment, will it affect your ability to get financing for the rest of a purchase?
Termination of the HELOC would be having the lien removed and the line of credit closed. Typically, if you close within 2 years (this varies by bank), you'll be charged an early termination fee. The ones I've seen are around $200.
Joe Sillaman that's what my realtor advised me. It isn't just the amount you withdrawal against your HELOC, it's the entire amount that you have access to. That's just one opinion. I'm not sure if he's right but I see no reason not to trust his experience. Can anyone else confirm this? Thanks!
@Gerardo Varela think of a HELOC as a giant credit card tied to your property. Once you have that line of credit you don't have to go through a loan process before buying a property. In a competitive market it makes you look like a cash buyer. Once you have the property you should "season" the property and then get a stand alone loan on it and pay down your HELOC. At that point you will have reloaded your buying power and look like a cash buyer for your next property. Rinse and repeat...
-Arlen
Can you explain what "season the property" means?? and whats a stand alone loan? sorry for the newbie questions
Kevin Lefeuvre I would try to use the same bank that you would be opening your business accounts with. This makes it a lot easier for money transfers between your heloc account and your business accounts. It also makes things much easier when doing taxes at the end of the year. This will save you time, which of course will save you money. Hope that helps! Good luck!