Which to use to fund first deal? conventional vs HELCO?

Question

Hello all, just want some advice on which to use to finance my first investment property. A conventional loan or a HELCO? Property price I am looking at is between $30,00-50,000 for SFH.

George Taylor · Answer

Sorry @Kelly Byrd I thought you originally posted this thread. I should've directed it to @Eric DeVito

George Taylor · Answer

@Kelly Byrd Conventional is great if you already have a property locked in. I would suggest looking into a HML as well since most sellers want a fast close, HELOC would work, well for this type of business plan as well. If you already had an investment property that had equity you could do a cash out refi on that and come up with the cash for your next investment through a HML without having to go through the traditional means of obtaining a HELOC and being able to get the funds in about 12 days. It's all about the timing in this business as you've most likely seen so far.

Kelly Byrd · Answer

I wanted to post an update after doing some more thinking and researching my own HELOC a bit more:

• Some HELOCs will do a fixed-rate advance. Locking in a 15 year fixed rate makes comparing against a mortgage on the new property a little easier. 
• If you're funding with a HELOC, you're basically making an all cash offer to the seller, that may make your offer more attractive to them, possibly getting you a better deal or making it more likely to be accepted.

Eric DeVito · Answer

@ Kelly

Kelly Byrd

Hello Kelly, I do not have any of those numbers yet. I was recommended a lender that funds these kind of homes in the price range I am looking at in regards to a conventional loan. Yes your scenario is correct. Conventional loan would be on investment property and HELOC would be on current residence which I only have owned a year thus far.

Kelly Byrd · Answer

I would be biased towards the conventional mortgage on the investment property because it doesn't directly risk your home and will likely be a fixed rate (vs variable on the HELOC)

Given that, I would look at it like this:

• Pick a time frame maybe 2-3 years (you said buy-n-hold, so that would be a minimum), compare the overall costs (fees, interest, etc) of the HELOC vs the conventional loan. If the conventional costs less, go with that.
• If the HELOC costs less, is it a variable rate? Many are. If so, you should take a guess at how much it'll rise in the next few years.
• If the HELOC still costs less overall, consider the risk of using your home as collateral. Weigh that risk against the lower cost.

Eric DeVito · Answer

@Michael Karl

Hello Michael, I was recommended a bank who would be able to give me a conventional loan for the property price range I am looking for. I will contact that lender tomorrow. I am looking to do a buy & hold. Maybe flip eventually. One step at a time though.

Kelly Byrd · Answer

What are the overall costs (closing costs, interest, etc) over the loan term you're considering? Would this a conventional loan on the investment property vs HELOC on your current residence? If so, you should consider what happens if things go south.

Michael Karl · Answer

@Eric DeVito the easy answer to this question is which has a better interest rate.  But a little more in depth answer would be how easy will it be for you to secure a conventional loan, and do you have enough equity in your personal residence to fund the deal?   I can speak from personal experience, I used a HELOC to fund part of my first deal.  Some things to consider is what type of deal you are doing, if this is a flip you can HELOC it and pay it off after you sell the property, if it is a buy and hold property that needs work you could purchase the property with the HELOC and do the needed work to increase the value then get the property rented and then refinance into a long term loan(known around here as the BRRRR strategy)  But there is no perfect answer to this question, you just need to weigh all the options and do what works best for you