How do I get my HELOC Money back out?

Question

My wife and I are looking to buy some rental property. We have a home equity line of credit that we could use for a down payment.  Our idea was that after the purchase we could refinance and take our HELOC money out to pay it back to our HELOC lender. However, I'm not so sure that I can do that easily without a bunch of caveats and gotchas. For instance, if we bought a property for $160k and put down $32k, could we refinance the rental property at a later date for the entire $160k, so that we could get our HELOC money back and repay the HELOC lender? We have never done this before and if someone could please give us an overview I would be very thankful.

Gerald Joyce · Answer

Thanks Brian. For someone just starting out, that was an explanation I could really get my head around. It helped a lot.

Bryan O. · Answer

@Gerald Joyce Welcome to BP. Check around the forums, there are tons of strategies and answers to questions like this.

Basically, if you don't plan to live in the property, you will end up needing at least 20% equity in it. This includes refinances. I have recently heard of investor loans with only 10%, but not enough to believe it's "a thing" again.

The usual HELOC strategy is to use the HELOC to purchase the property with cash. That lets you get it quick. Then you fix it up so that you add an extra 25+% value. Then you refinance into a bank loan, pay off your HELOC, maybe pocket the difference, and look for the next investment.

Every strategy that involves getting all of your money back out requires you to buy at a large discount, improve the property to build that equity spread, get significant market appreciation, or some combination of those.

Best of luck and happy reading. There is a ton of information on the site!

Joe Villeneuve · Answer

Here's how it works:

Option #1:  Heloc for DP, and refi for Rate & Term (this just equals to total leverage at the time of refi ONLY)

1 - Buy Property2 - Refi for 75% of the ARV (if this doesn't cover both the original mortgage and the HELOC return, don't bother)

Option #2:  Heloc for DP, and refi for Cash Out (this equals up to a total of 75% of the ARV.  This is how you can get more than the cash/HELOC you used for the DP back)

1 - Buy Property2 - WAIT 6 MONTHS for seasoning 3 - Refi for 75% of the ARV

Brie Schmidt · Answer

Investment properties require 20% down for SFH and 25% down for 2-4 units.

So if you use the HELOC for the down payment the only way to get it back out is by increasing the value enough to do a cash out refi and get your money back.  Typically with cash outs on investment properties you can do up to a max of 75% LTV on SFH and 70% LTV on 2-4 units

Ned J. · Answer

I recently opened a HELOC on my house with same goal as you and am also trying to learn the best way to use it.

The HELOC basically allows you to buy very quickly just like cash...so if good deals come up, you have an advantage to get a good cash price and close quick.... then you get a conventional loan for long term financing, but you still have to have 20-25% of "skin" in the deal.

You will only get your 20-25% back if you find a great deal or add value to the property and get it appraised for more $$, so you can pull enough cash back out to pay off the HELOC completely

If you cant do that, you will have basically financed the entire thing...80% conventional and 20% balance in your HELOC that you used as your "cash" down payment

Mike H. · Answer

It is definitely a tougher market these days to find discounts. But there are flippers and buy and hold investors in every area still buying homes. And they're only buying homes where they can get discounts of 25 to 30% or more off the estimated appraisal value.

What I would say is that if you're paying 160k for a house thats worth 160k, you're missing out on the biggest value gain in investing - buying it right.

Its hard to do well investing if you're going to pay retail for anything in any town. First off, the more you pay, the less they cash flow. Second, if you pay retail, you are losing money the day you turn the key.  Because if you were to turn around and sell that house the very next day, you'll have to come out of pocket to pay for the realtor fees and closing costs.

If you could make decent money paying retail, then literally everyone would be investing in real estate.

The expectation should be that you're only going to buy something with a reasonable discount. And I would suggest that a reasonable discount for an investor is to pay 70% to 75% of the ARV (after repair value). Any more than that and you're really having to be in some unqiue scenario to where the numbers still make sense.

Gerald Joyce · Answer

Thank you Brie and Joe. I am very new to this, but it would appear that my only hope of using the HELOC and getting my money back is find undervalued properties or do improvements? I live in Chicago and was looking to buy something in the city. I'm not really sure that I can find something that undervalued or a place that would increase dramatically in value with some minor improvements. However, I am new to this and may be wrong. Do I seem to have that right? If so, do you have any other suggestions with regard to a down payment? We live in a two flat in the city that I rehabbed myself and have a tenant upstairs. We like renting and see this as something that we could potentially do on other properties. Mostly, we were thinking about small condominiums and two flats as long as they are cash flow positive after setting money aside for maintenance, etc.

Sam Shueh · Answer

Talk to the same lender who approved your HELOC. It will be based on loan to value, debt to income. The HELOC is often good for 10 years and can be converted to a loan. You pay the whole amount of $160K from HELOC not using it as down payment.

How do I get my HELOC Money back out?

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