Could use some advice on whether to use HELOC to fund first deal

[Shawn Furrow]

I have been spending a ton of time educating myself in the realm of RE Investing and I've been analyzing deals looking for a good one to make the jump. I believe I have found a few potentially worth making the jump but I'm not sure how to go about funding one. I found a house that would require a 20% down payment of $40k. This property should cash flow about $230/mo with a CoC ROI of about 4.5% if I were to pay the down payment in cash and put $20k in rehab. I do not have this in cash but after talking to a loan officer I do have enough equity in my personal home to get a HELOC for potentially as much as $140k for about 6.5%. If I took out $60k for down payment and rehab that would leave my monthly interest-only payment of $350. So the HELOC payment would be more than the monthly cash flow. However, I do have the ability to save up probably $3k a month from my day job so I could easily cover the difference and even begin to either save for my next deal or start to pay off the HELOC (or both).

Given all of this, does it make sense to do the HELOC just to get into a deal earlier or do you all think it would be better for me to wait and save up more capital before jumping in? Are there other funding options out there that would make sense in my situation? Thank you in advance for your help!

[Matt McGuire]

Thats fantastic, congratulations! That's the way to use a HELOC. It's a lot like hard money. You need to be able to get out of it pretty quickly so it doesn't eat up your cash flow. I used hard money for a flip and the interest only was $2k/mo. It was not a big deal at first, but the house took 4 months to sell so I lost all that profit. That was my mistake for not knowing the ARV. I trusted my realtor and he was wrong. But, I learned a lot.

Another option for funding is borrowing from a 401k. You can borrow up to 50% or $50k whichever is less from a current 401K and you pay it back to yourself with interest. So, if you have variable interest debt, it might make sense to do that. There is almost no cost to do it. The risk is that if you leave your job for any reason before it is paid off, then it is considered a distribution and you have to pay a 10% penalty plus income taxes. But on 50K, that would only be like 5500 so it's not that bad. But otherwise, you pick your payback period between 1 and 5 years and then just pay yourself back with interest. The other great thing about it is that it doesn't show on your credit report as a loan since it is your money. I recently renovated a house using a credit card with an introductory 0% rate and have been making payments to reduce that. But when the time expires, I am just going to pay the rest off with my 401k. That way I never paid any interest on the cash and I will be paying myself an 8% return on that money. It was a way for me to finance this one myself.