Purchasing First Rental Property With Cash: Then taking Money out with HELOC

[Curtis C.]

I am looking to acquire my first rental property. I often read how people leverage their money with hard money or private money. I am very conservative, and like to keep my debt ratio as low as possible, and as such tend to shy away from hard money loan products.

What I was considering, is perhaps buying my first rental property with cash money, and then leveraging my money with a HELOC. And keep the cycle continuing, effectively growing my initial pile of money.

I only pick up properties that need work, even if its just a light cosmetic job or a hoarder house and everything is otherwise structurally sound. Once I buy the property, rehab it, and have a tenant in place I will pull a HELOC out to acquire my next property. That way im leveraging my money, with a cheap 4% interest rate. I work with some investors here in DFW that can acquire houses at 55-65% arv minus repairs. So im effectivly using cash to buy a property at say 65,000 and its worth 100,000. I just traded 65k for 100k, and then im going to pull a heloc out on that 100k. I just created 35k in equity plus cash from the tenant and have a heloc at a cheap rate to pick up another one.

Does this sound like a good approach? Thank you very much for your help everyone, I really have learned alot during my short time here.

[Harry M.]

Hey Curtis,
Sounds like you've got a great foundation with no debt and good credit to start investing in RE. My wife and I did the same thing. Paid off the house and all the other debts before we got started. We figured that by having our financial house in good order, there was far less of a chance of being forced into reactive decisions due to being short of money when it came to RE.

Anyway - I think the idea of buying with cash and pulling it out later can have some advantages - there may be deals you can find as a cash buyer that would be harder to find with financing. I've done this with a HELOC on my primary - used it to finance about 50% of a property that I paid cash for.

My concern about using a HELOC for a buy and hold property would be the variable rate. As good as interests are right now, it seems highly likely that they will go up over time. HELOCs are also really hard to get on investment properties. One alternative would be to buy with cash and do a cash out refi into a 30yr conventional loan. Most lenders do require a seasoning period of 6-12 months before they will base the amount they will lend (usually 70-75%) on a new appraisal. As Gene mentioned, it's really important to do the groundwork with the bank first, so that you can be really confident that your money won't end up locked into the property long term.

-Harry