Using 2 HELOC's to Purchase my Next Rental Property?

Question

Hello,

My name is Cameron Jensen. I am a newer investor from UT. Big fan of the podcast, and I'm excited to continue with my Real Estate journey. My wife and I moved out of our primary residence a few months ago into a duplex so that we could house hack the property. We rented out our first house, and we currently have tenants that rent out the other unit and they are completely paying for the mortgage, so we are living rent/mortgage free! (Yay!) It has been super nice and has been a great way to get started with Real Estate.

We are looking to buy another rental property, preferably a duplex or triplex. The Brrrr strategy sounds intriguing and it is how we want to go about doing our next deal. Since cash is king when it comes to getting properties at a discount, we are trying to find different ways to pay for the property all cash (most duplexes in my area go for around $300K). We have about $80K in equity from our previous house and about $44K in equity from our current home. I just started looking into using a HELOC to purchase our next rental property and I have a few questions about it that I have not been able to find elsewhere.

1.) Can we get a HELOC on our rental property AND our primary residence?

2.) Can I go to a local Credit Union to get a HELOC for both or one of the properties? Or do I have to go to the bank that I have the mortgages with already to get the HELOC?

3.) If I am able to get a HELOC from both properties, (I know you can only take anywhere from 80-90% out, so that would give me around $105,400 as a HELOC) and I have the difference of cash ($194,600 if I was basing it off of a $300K purchase price) from a private money lender, can I pay all cash on a property using three different payment types (2 HELOCs and the rest from the private lender) Or does it get complicated when you try to use more than one way? (Hopefully this last question makes sense)

Any comment or help would be much appreciated. Thanks!

Neil Henderson · Answer

Welcome Cameron, and congrats on the house hack. It is, in my humble opinion, the best way to get started in real estate investing. I wish more of my young cousins would see it's potential instead of complaining about not being able to get into the housing market and not wanting to have roommates.

1.) Can we get a HELOC on our rental property AND our primary residence?Very definitely on the primary residence, maybe on the rental. It depends on the bank.

2.) Can I go to a local Credit Union to get a HELOC for both or one of the properties? Or do I have to go to the bank that I have the mortgages with already to get the HELOC?Definitely do not have to go to the bank who holds the mortgage. Our mortgage was held by Wells Fargo, we got a HELOC through America First Credit Union. Shop around.3.) If I am able to get a HELOC from both properties, (I know you can only take anywhere from 80-90% out, so that would give me around $105,400 as a HELOC) and I have the difference of cash ($194,600 if I was basing it off of a $300K purchase price) from a private money lender, can I pay all cash on a property using three different payment types (2 HELOCs and the rest from the private lender) Or does it get complicated when you try to use more than one way? (Hopefully this last question makes sense)80-90% sounds pretty aggressive to me. We were only able to tap 75% of our equity, and that was pre-COVID. Lending standards are tighter in general right now.

If you are planning to do a BRRRR with the HELOC, keep in mind a few very important considerations:

• Consider the HELOC funds short term debt. I would not recommend a strategy that left an outstanding balance on the HELOC for longer than 12-18 months. 
• If you plan to BRRRR, start talking to end lenders (refinance) now BEFORE you start looking at properties. Tell them exactly what you plan to do, where the funds will be coming from, and what they will require to complete the refinance. Cash-out refi's have tightened up in the last 3 months, we had our latest drop from 75% LTV to 70% LTV. Not the end of the world, but definitely had to leave more money in the deal.
• Keep in mind, most cash out refi lenders are going to require you have 6 months cash reserves (to cover 6 months of PITI) sitting in an account somewhere.

Brian G. · Answer

@Cameron Jensen fyi a Heloc can be used as down payment funds on a new acquisition. Just did that on a recent purchase. I Opened the Heloc and a checking account at Pen Fed. Wrote a check from the Heloc account and deposited it into my checking since they sent me special offer Heloc checks with a lower introductory rate. When purchasing the property, I wired my down payment from my checking account. Fyi, to write off the interest on a Heloc you must purchase directly with Heloc funds. ie you can not purchase something with a Credit Card, reimburse yourself with the Heloc and then write off the Heloc interest according to my CPA. *If* you do go forward with using a Heloc to invest, consult your CPA and if you don’t have one *find one!*

Jordan Mummau · Answer

@Cameron Jensen

You don’t need all cash to BRRRR. You can finance the initial purchase, use a HELOC to reno and then refinance out. Yes you’ll pay closing twice but you just have to factor that into your deal and make sure it still makes $.

The other thing people don’t realize, when you apply for a HELOC, banks will use that against your DTI when you refinance.

Meaning, if you get a $100k Line of credit. Say you don’t use any of it, but banks will act like you are fully leveraged on the line and your monthly DTI ratio will have to be good enough to cover the interest only payments on the full $100k.

This is where LLC’s come in to play. If the asset is owned in an LLC and the line is given to the LLC it doesn’t affect your personal ability to borrow as critically as if everything was in your personal name.

Cameron Jensen · Answer

@Brian Gerlach That sounds great, I will look into those things. Thanks!

Cameron Jensen · Answer

@Jordan Mummau That is all really good to know. Thanks Jordan

Cameron Jensen · Answer

@Daniel Kim Thank you so much for the advice, I appreciate it!

Cameron Jensen · Answer

@Neil Henderson All great advice, thank you so much!

Daniel Kim · Answer

That's what I did to buy my last rental - I pulled from my two different HELOC's. Of course now my DTI is through the roof but what can you do...

Luckily I'm still in the interest-only phase of my HELOC's but not looking to 2025 when my first HELOC draw period ends and I need to start paying back principal. Penfed is the credit union always mentioned for HELOC's on non-owner occupied properties by the way. For your primary residence there are probably a lot of good options with high LTV. Good luck!

Neil Henderson · Answer

Probably. It really depends on the refi lender, and that's why I would recommend talking to a few potential lenders first.

There's no reason a combination of funds from multiple sources couldn't be used to purchase a property like cash. You'll need to have those funds deposited into one bank account before making the purchase.

The real challenge is finding a deal that you can add enough value to properly execute the BRRRR. You're looking for a property you can acquire for 70-75% After Repair Value minus the costs of the rehab and holding costs. If you overpay, you're going to leave money in the deal. If you under estimate the rehab, you're going to leave money in the deal. If the after repair appraisal comes in low, you're going to leave money in the deal.

Be sure to factor in closing and holding costs, especially if you are not using Delayed Financing. The lender will require a seasoning period after you find a tenant, and that could be 6-12 months.

Cameron Jensen · Answer

@Neil Henderson that is all great advice. Thank you so much for the reply, I really appreciate it. So if we were able to get two HELOC’s and use private money for the rest, would we be able to use all three ways on one home to pay cash? Still trying to figure out in my head how that all works.

Using 2 HELOC's to Purchase my Next Rental Property?

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