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

Question

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!

Shawn Furrow · Answer

@Fran Pratt @Joshua Patrick

I was ultimately able to do a 100% BRRRR and get all of my investment back and it still cash flows about $200/mo after putting money away for CapEx, repairs, vacancies, etc. It's not a ton of cash flow but I get to use my money again so I'm pretty happy with that. I learned a lot which was my primary goal with this one. Now I'm currently looking for my second deal but it's been slim pickings in my area. Sorry for the late reply!

Matt McGuire · Answer

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.

Shawn Furrow · Answer

@Ashley Noethe

Somehow I missed your reply until now. Yeah perhaps the biggest thing weighing on my mind right now is how much the house is going to appraise for when I'm done renovating it and how much of the HELOC we can pay back with the refi. So yeah hopefully my numbers turn out to be at least close. Thanks!

Matt McGuire · Answer

That's awesome! congratulations

Joshua Patrick · Answer

I would like to know how it went as well.

Fran Pratt · Answer

@Shawn Furrow : how did it go? I am looking to do something similar and would love to hear how this went for you... TIA

Shawn Furrow · Answer

@Matt McGuire

Wow those all sound like great options. I especially like the 0% CC to 401k loan idea. Pretty creative. Thanks for sharing!

Shawn Furrow · Answer

Thanks for checking in! So I ended up getting the HELOC and I am currently using it as short term funding for a property I just bought two weeks ago (first deal!). The HELOC covered the purchase of the house in full $80k as well as 80% of the renovation. My plan is to BRRRR this one and get most (or possibly all) of my HELOC money back out. We'll see how it goes!

Ashley Noethe · Answer

Would it work to do a cash out refinance to cover the down payment money instead? We've done it both ways. The last property we purchased using HELOC route as down payment funds and the monthly payment on it was killing our return so we actually ended up just refinancing the HELOC back into our house. Obviously this all depends on the current mortgage on your primary residence and running the numbers, but just another option to consider. As mentioned above, if you could pay back the HELOC fast then it could good option but if not then it just a matter of having strong confidence in your numbers.

Matt McGuire · Answer

Just found this post. So, @Shawn Furrow what did you end up doing? Just curious.

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

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

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