Heloc for a Down payment?

Question

Hello all!

I am looking to purchase my first rental property. I am currently in the looking a deal stage and have found a few perspective properties that I think will work. My question is this. I am looking to use my HELOC on my house as a down payment. Is this a smart idea? I have run the numbers on the calculators and the numbers all work out. I just can help but thinking of all that can go wrong so to speak. Thanks for any input! If anyone has any suggestions I would greatly appreciate it!

Mark Sewell · Answer

I agree with your comments here.

You could justify the risk of using the HELOC (secured by your personal residence) if you are buying a deal that has some equity in it.

If you are buying pretty houses, and looking for appreciation, maybe this isn't a wise move (unless you really get it cheap).

If you are buying a house that needs some work, in a good neighborhood, that you can fix up and refinance, then it might not be a bad plan at all.  It just becomes a math exercise at some point.  You calculate the reserves you will need, the holding costs, and all that.  Can you increase the ARV enough to make it work?

Then you look at it all from a risk management perspective.  What happens if you fix it up and rent it, and then it doesn't appraise like you thought it would?  Maybe you only are able to get part of your HELOC funds back out of your refi?  Do you have adequate earning power and/or reserves to ensure that HELOC gets paid back, should this deal not go exactly according to plan?

I'm not going to lie, I am also seriously considering doing this same thing with my personal residence at some point.  I owe just under $110K on a house that should appraise close to $200k.  It is one of a several small buckets of funds that I am seeking to leverage at some point.  Might be a year away yet, building those reserves and getting my own financial footprint reduced (might knock out the car payments first), but we shall see.  I am not going to do that until my wife and I have some self-imposed 'risk management rules' established for ourselves and some kind of reserves in place.

Mathieu Gascon · Answer

Thank you for the responses! So there are a few houses that I have looked at that are not yet on the market. There is some work to be done like siding on the house and some work that can be done inside. I think that would increase the value on the house and as long as I can get it for the right price. My fear is that I would use more of my HELOC for repairs as well. I think I also may be to the point where I might need to save more reserves, unless the right deal comes across.

The intriguing thing about some of these properties is that they already have some tenants in them. What are your thoughts about this? My thought is the transition would hopefully be seamless if I kept things like rent and utilities status quo.

Mark Sewell · Answer

Not sure I follow... Can you share some numbers?

The HELOC is going to be on your personal residence, right?  So think of that as short term money.  Use it for a period of time, maybe long enough to do your project.

I gather the plan is to use the BRRRR strategy, so you buy a house with at least some degree of equity in it.  You renovate it, and rent it out.  It appraises now higher than it did before, and your equity position is enhanced, at least a little bit.

At this stage you would either refinance the rental property and pay off the HELOC on your primary residence, or you would simply leave the refi on the existing financing in place and figure out some other way to pay off the HELOC.  Is this what you are asking?

If so, then it makes a lot of difference what the rates are.  HELOC rates will probably be quite a bit higher than whatever bank loan or mortgage terms you get on the rental house.

Also from a risk management standpoint, you would want to protect your primary residence and make sure that HELOC debt doesn't put your own home at risk.  Remember when the next down turn rolls around, the banks will probably take away that HELOC facility or modify it somehow -- or that is what I gather from the old salts around here on BP forums.  You cannot count on it always being available.

Robert J Koch III · Answer

@Mark Sewell thanks for your input! I'm at the phase where I keep thinking should I pay off my car or just go for it? I am in a situation where I have a good amount of equity on my house. I think if I can find the right deal, it may be a good idea. My question is this though. The benefit I see of a cashout refinance is to pay my own personal HELOC of quicker. But I am still increasing my mortgage payment of the property by using the cashout. Am I wrong in thinking this way? Or can you help me make more sense of this? I've also run numbers on a property with a huge cash out, but the rent income couldn't support the cashout. If I kept it as a rental I could make a positive cashflow.

Joseph Pietrzak · Answer

Is there any opportunity to add value to the properties? If you can add value then you can do a cash out refinance after adding that value to pay off your HELOC.

Robert J Koch III · Answer

@Jason D. Thanks for the response! I never thought about an exit strategy in case things go bad. I could afford the monthly payment if there are no tenants in the building. Do you recommend any other strategies when getting started?

Jason D. · Answer

@Robert J Koch III definitely risk in that strategy,  but there always is. If you're confident in the deal, it's a good way to get in with little to no money.

Having an exit strategy is very important. How will you pay back the HELOC?

Heloc for a Down payment?

Most Popular Reply