Best way to use a line of credit for real estate

[Nicholas Z.]

I discovered I could get access to a couple lines of credit recently, so I went ahead and opened them. Then I realized I wasn't quite sure how to use them to invest in real estate. From my research, it seems like the options are:

1. Buy the property with the LOC and forego a mortgage. This has the upside of a lower interest rate than a mortgage, ability to offer cash, and faster payoff due to simple interest vs. amortized interest. The downside is that the interest rate is variable, the loan can be called at any point in time, and I can't write off the interest because it's not a mortgage.

2. Buy the property with a mortgage and use the LOC for the down payment. This one seems to be popular, especially when combined with commercial mortgages that don't worry so much about the seasoning of a down payment. I tried running some numbers on the properties I own, and all of them I couldn't afford the principal + interest on down payment as it completely wiped away my cash flow. I could, in theory, just pay interest each month, which would preserve cash flow, but then I'm not really getting closer to owning the property and I still have the issue of the variable interest rate and the loan being called at any time.

3. Buy the property with the LOC and then refinance into a mortgage. I suppose if I wanted to make a cash offer on a property that I could get a mortgage on, it could be advantageous to pull the funds from the LOC, buy in cash, and then refinance into a mortgage and pay off the LOC. This is particularly appealing with a BRRRR (which I haven't done yet) but could be applied to anything.

Do these make sense? Is there any other way to use a LOC that I haven't mentioned? And is there any smart strategy to treating a LOC as an interest-only loan?

[Bob Okenwa]

@Nicholas Z.

Sounds like option #3 is going to be your best bet. LOC's are best used as short-term funding to acquire a property with cash and then refinancing shortly thereafter. Doing a BRRRR this way is called Delayed Financing and it's a powerful strategy since no seasoning is required. I believe the only catch is that you can only refinance the amount listed on the HUD-1 as the purchase price, plus closing costs.