Experience with HELOC?

Question

I currently own a home in Riverside County, California (East of Los Angeles). My house is appraised at $450k and I owe $240K currently. I was reading about doing a HELOC in order to make a down payment on another property. I was considering only using 25% of my equity to be safe. Thoughts?

I am considering purchasing a multi family property (not identified yet) in the Los Angeles area near the University of Southern California (USC) or in South LA, and renting out the property. I will not be house hacking.

Can someone with experience using a HELOC let me know if it was beneficial or if anyone had a negative experience?

I really appreciate everyone's time and feedback.

KJ L. · Answer

@Benjamin Manibog

We're in the Vermont Square neighborhood near USC and we're seeing more gentrification and property movement. There's new development like LAFC stadium, new Honda dealership & George Lucas Museum but also property prices in the area are still some of the lowest prices in Los Angeles City, favorable zoning (primarily LAR2 and up), a lot of craftsman style homes, and the councilman is working really hard to rejuvenate the local parks. LAPD recently moved 300 police officers to the area and we've noticed more house flips too.

John Warren · Answer

@Benjamin Manibog the HELOC is one of the best tools we have in our arsenal. If you think about it, your equity is giving you a zero percent rate of return currently. If you can borrow it for 4, 5 or 6%, as long as your rate of return is greater than your interest rate... you win! You are making money on the arbitrage, plus you can write off the interest payments.

The real question is how do you get the money back for your HELOC. You either pay it down through cash flow, or you buy a great deal and do a cash out refinance to get the equity out of the new property to pay back the HELOC.

Dan H. · Answer

A couple items: HELOC versus refi.  HELOC are variable rate.  For me it means I do not use HELOC for long term items.  So if you wanted to purchase, BRRRR in less than a year and pay back the HELOC great.  If you plan to use the HELOC for your down payment until some unknown time in the future then I would pull money out of your primary via a refinance with a fixed rate.  The refinance loan will cost a little more but the peace of mind of a fixed rate loan makes it worth it to me.  I say this and I am not financially conservative.  I attempt to keep my RE at 80% LTV and highly believe in the benefits of leverage.  I just am not a fan of long term variable rate loans.

Now for the plan...  At 75% LTV on your home loan (HELOC or refi) you will have just under $100K to invest (unless you have other money).  At a 75% LTV purchase (standard non-owner occupied LTV) you can afford just under a $400K property with no reserves from the money extracted from your home.  You will not find a multiplex near USC for that price.  Los Angeles is a lot more expensive than Riverside.

I do believe you are on the right path looking for ways you can leverage your equity in you primary residence to have it work for you.  Have you read Rich Dad, Poor Dad: what the rich teach their children that the poor do not?  What you have are dollar sitting around doing nothing.  What you want is those dollars to multiply (put the money to work for you).

Good luck

David Mussaw · Answer

I think it is a great idea if the numbers make sense. I recently acquired a HELOC on my primary residence for improvements to convert it into a rental property. I'm budgeting $40k for the improvements which include a $10K reserve for any project mishaps or incorrect cost estimations. My credit union gave me a one-year promotional interest rate of 2.99%. After the year the rate can go as high as 18%. The HELOC is interest-only for the 10-year draw period. If I were to use the full 40K at 18% I will lose almost $100 per month factoring in PITI, 10% vacancy, 10% maintenance, 10% CapX, and 10% management fees. I want to disclose I bought my residence in 2010, it was a distressed REO property located in a C-Class neighborhood (some might argue D-Class). I also refinanced my house in 2017 for approximately $200K including closing costs at 4% on a 30-year mortgage.

Aaron K. · Answer

@Benjamin Manibog  Good plan in theory but unless you have cash as well you probably are priced out of the area right around USC.

Craig Jeppesen · Answer

I have a heloc and it is a great way to access equity from your home. I have only used my heloc for improvements to a flip or brrrr and I get my money back fairly quickly. Me personally would not want to use my heloc long term for a down PMT but I know many people do. If it was me I would have a plan to pay off the heloc quickly if you wanted to use it for a long term down pmt.  I am a conservative investor and don’t like to have long term debt. If you are fine with leverage and the numbers work I don’t see a problem with your plan and say go for it.

Eric Carr · Answer

It's awesome, you have the money on "hold" and don't pay the loan until you use the money. I'd look at it like this, whether you buy, renovate, and hold or not. But given the area you are looking (I am also), you might find something in need of repair, buy with HELOC, fix, rent, refinance and pay of the heloc. Do that math and make a plan and budget that works for you. If budget isn't necessarily a constraint, find out where the numbers work and get it done. You'll have that new loan to pay as well as the HELOC, so do the math and make sure you're covered, maybe consider a plan to pay the HELOC off ASAP with a refi or other method. Sounds like a fantastic idea

John Warren · Answer

@Benjamin Manibog for sure! Don't be afraid to use the HELOC, but be cautious to make sure you know how to get the money back. As others have said, you are dealing with an interest only/variable rate situation. I am using one to purchase a 6 unit here in Cicero, IL right now, so I am practicing what I preach!

Benjamin Manibog · Answer

@John Warren Thank you so much for the advice! I especially appreciate the tip on using the refi on the property to pay off the HELOC.

Benjamin Manibog · Answer

@Aaron K. Thanks for responding. Is that the case for all areas in LA when using a HELOC or just there? Is it because the price is too high or what’s the reason? Moreover, is there another area you’d recommend in Riverside?

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