Newbie Using Home Equity to Finance a Deal

[Michael Hildebrand]

Hi everyone! New here and looking for options with regards to using the equity in our current home to get started investing. Apologies in advance for the long winded post!

I'm working on an off market deal back in my home town for a 1200 sq ft 2 bed 1.5 bath home with a detached 2 car garage. It has been updated throughout the past 10 years and major capital items are all less than 10 years old (furnace, roof, water heater, etc...). The property is in great shape and the biggest upside is there is an opportunity to add another unit to the back half of the lot (another 2 bed 1 bath home).

The property is in a small Wyoming town with very low inventory. The property recently appraised for 268k in January and each home would rent for 1200-1300 dollars when finished. Since the appraisal, the market has slowed and prices are coming down, but not rapidly, the seller is however willing to work on the price, he just doesn't want to do any type of seller financing.

I have great contacts back home for contractors and subs and the new home would cost between $150-170 per SQ ft to complete (looking between 800 and 1000 SQ ft) after discussing builds with them.

Now that that's all out there... I'm inexperienced in using home equity for financing deals, but my wife and I have roughly 300k in equity at this time. I've been looking into HELOCs with local banks and credit unions, but should I be exploring other options for that equity or using different financing all together for a deal like this?

Thanks for taking the time to read this if you've made it this far! Any help or advice is much appreciated!

[Kaylee Walterbach]

Hey! I'm also a rookie, but I was looking into the same thing a few months back. We have equity in our current residence and wanted to use a HELOC to fund our next rental property purchase. We didn't want a cash-out refinance because we got such a good interest rate in 2020.

I recommend looking into the difference between a HELOC and Home Equity loan and deciding which better fits your needs. HELOCs work more like a credit card (to some degree), and HE loans are more like traditional loans. Ultimately, we decided to get a HELOC—whether or not we end up using it to finance our next property, we now have access to that cash if we need it! (With a HELOC, you only pay interest on what you use.)

A few more things to think about:

-Definitely shop around for good rates. You would be surprised by how much it can vary.

-Lenders don't typically like you using a HELOC to finance another property; they want you to use a home's equity to improve that same home. I don't think it would stop them from lending to you altogether, but something to keep in mind.

-A HELOC is a temporary solution, and you need to make sure you can pay off the balance once the repayment period starts (typically after 10 years). We decided that in the grand scheme, we hope to have multiple properties by then and should have no issue refinancing something to pay it off—but make sure your long-term needs and goals fit this concept!

-Learn about the HELOC payment terms/amounts and work that into your deal analysis like any other expense to ensure the numbers work. (Example, if you use you HELOC for a down payment, that means you're paying $X in interest every month during the draw period. Make sure that $X amount doesn't put your cash flow in the negative.)

From one rookie to another, I hope this helps!