1st Purchase utilizing HELOC...what are my options?

Question

I have a few questions and I will definitely be seeking professional guidance as well, but wanted to throw this out in the forums.

Background:  I have just opened a single member LLC.  I have a personal HELOC on my primary home.  I've been looking at foreclosure auctions.

1) If I wanted to use my HELOC to bid on a property and with my LLC in mind, I'm leaning to having to fund my LLC using the HELOC, with my bid price in mind (plus other costs) and then bidding on a property and if successful, write a check from my business account.  This is where it gets confusing for me.  If I go this route, I'll be paying interest payments personally.  How do I invoice my company to recoop the interest and the payments on the principal?

2) Is there another option?  Bid personally, sell to my LLC and take a conventional loan and repay myself after 6 months?

3) Do you have any experience on auction sites for foreclosed homes?  Any advice you would share?

4) Or am I totally in the wrong in and you have another avenue you think a new investor should look?

Thanks!

Steve

Gregory Wilson · Answer

Steve: If you are going to bid on an Ohio Common Pleas Court  foreclosure, the process is pretty safe because the foreclosing lender has to include a "PJR" which is actually a "Preliminary Judicial Report" which is a title report and include a commitment for title insurance should the bidder be successful and the property to be conveyed.

This differs from a liquidation auction by a lender, private auctioneer, receiver (other than an actual foreclosure case) where you might be successful but the property has pre existing liens that don't get swept away by the foreclosure case.

For your first one of these, get a lawyer to advise you. Go to the room where foreclosure cases are heard in the courthouse and sit through a docket of cases and get the names of the lawyers on both sides that you think know what they are doing. Don't pick someone off the Google search. The foreclosure process is confusing because a large number of the scheduled auctions don't happen at all or don't happen when they are scheduled for various reason. Your lawyer will tell you why.

Good luck!

Travis Timmons · Answer

Is this your first investment purchase altogether OR your first purchase using a HELOC? My advice would differ based on the answer to that. If this is your first investment altogether, I'd opt for a more traditional, simpler purchase.

The one thing to keep in mind is that a HELOC is a great short term debt instrument. Do not treat it like cash. Using a HELOC as a down payment is 100% financing on a property. That's a risky move. If you don't see a realistic path to getting the HELOC paid off 12-24 months after you take it out, I don't love the idea.

Nathan Gesner · Answer

Your equity is not a savings account from which you can withdraw for free. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEYou cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).

Key Numbers

• Home Equity Loan Interest Rate: 6%
• Mortgage Interest Rate: 7%
• Rental Income: $3,000 per month
• Expenses (management, taxes, insurance, maintenance): $800 per month

Income and Expenses

• Monthly Rental Income: $3,000
• Monthly Expenses: $800
• Monthly Mortgage Payment: $2,000

Explanation

• The investor earns $3,000 in rent each month.
• They pay $2,000 on the investment property mortgage and $800 on other expenses.
• This leaves $200 profit each month or $2,400 per year.
• However, you have to pay $6,000 interest on the equity borrowed.
• This leaves you with an annual loss of $3,600.

This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.

Gregory Wilson · Answer

Mod:

Gregory Wilson · Answer

A loan for an investment property purchase is a little different than a cash out re-fi. Talk to your preferred lenders about whether they see a cash our re-fi as being approved with the same standards as an investment, i.e. loan to value, debt coverage ratio, etc. If there is no problem then the HELOC will provide more flexibility since the cash out re-fi may yield more proceeds after improvements when applying the 70 or 80% LTV limit whereas you might get improvement proceeds from an investment loan but you won't want to because there will be a lot of red tape, inspections, draws, lien waiver compliance and a lot of other crap they load onto improvement loans on investment property.

Alfath Ahmed · Answer

If you are a newer investor, I would not complicate the process. It is better to stay simple. The more complicated you make the harder it will be.

Just own 1 LLC and buy turnkey or value-add deals in a set market. Start with turnkey then build systems and buy BRRRR deals. Use your HELOC money if the rates are more attractive then hard-money or private money.

Steve Dora · Answer

Yeah, I think you're on the right mindset about the double interest (heloc downpayment & loan payment).  That's why I was leaning to foreclosures so I can do full cash (heloc) purchase.

The other part I need to get more fluent in is how to document all of those action items in the LLC to keep the corporate veil.

I'm glad I'm not the only one!  Good luck too!

Blake Spiller · Answer

Steve I’m in exactly the same boat that you are in right now! I also created a LLC and I’m hoping to use my new HELOC on my current home to buy my first property through my LLC. I have the same question about the financing part and tax write off as well. My plan is to transfer my money from my personal account into my LLC savings to make my housing purchase. I’ve heard and read it’s difficult transferring a house from your name into your LLC versus buying it under your LLC in the beginning. My biggest struggle right now is determining whether to buy a house outright with my HELOC and then refinance it in hopefully 6-12 months or do I use a smaller part of my HELOC for a down payment and try to get a traditional loan for the rest of the payment? At this point in our market it seems like to me the better option would be using the HELOC for the entire purchase just because the interest on two different loans would eat up any possible cash flow. It’s definitely a tough decision and it seems like the market is hard to find any deals right now. I’ve been driving for dollars in hoping to do some direct mail here soon to possibly find a deal that way where I can use my HELOC only for the purchase and still have some of it leftover for repairs. I’m glad you posted this because I was having the exact same thoughts. Good luck!

1st Purchase utilizing HELOC...what are my options?

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