HELOC on Primary Home for Multiple Down Payments

[Matt Bristow]

I have 2 STR's in Rehoboth Beach, DE and have the itch to purchase some LTRs in the suburbs outside of Philly. Currently have the ability to open a HELOC on my primary for $250k. Does it make sense to utilize the HELOC for multiple down payments on LTRs assuming the properties will cashflow? I have the ability to lock the HELOC into a 15 year prin+int payment schedule immediately at 4.34%. Should be able to cash flow around $300/mo per LTR using this method. Drawbacks? Does this seem like a good strategy?

[Scott Trench]

I do not like the HELOC for down payments. I believe that debts should be structured and used in ways that align with the use case.

For example, the HELOC is a short-term, variable interest rate loan. This is great for financing small purchases, or as a source of short-term liquidity. I'd use this as a primary tool for a fix and flip, or BRRRR loan. In these cases, you expect to complete the project and exit (either by selling or refinancing the property into a long-term loan) in a short period, likely no more than 6-12 months

However, if you use the HELOC for a down payment, you are leveraging a short-term loan against a long-term asset. You will likely not be able to fully repay the down payment on a traditional investment property in a year or two via cash flow. The result could look like something like this:

- You use HELOC ($250K) to purchase $1M in properties with $750K in long-term debt. Let's say it is 4 long-term rentals.

- Each property produces $300 per month in cash flow, excluding HELOC payments. $1200 total.

- Interest on your $250K HELOC is 4.34% - abut $10,800 per year, or $900 per month. Now, cash flow is $300 per month.

- OOPS! We still have to pay back the HELOC. Suppose you pay it back in equal installments over a 5 year period. That's $50,000 per year, or $4,167 per month. 

This completely crushes your cash flow. And it really is the same story when used for a long-term rental in most use cases. People forget that they have to pay the HELOC back somehow. Real estate, in this case, becomes a vehicle that sucks cash OUT of your life in a major way until the HELOC is paid off. It can limit cash flow and feel like you aren't getting ahead.

Now, you are technically getting ahead, because you are paying off the mortgage on these properties (amortization) and benefitting from appreciation. But, too often, the HELOC brings tremendous risk when used to finance long-term properties, and is ultimately a suck on cash flow.

Investors who did this in the last 5 years may have made a killing with the appreciation we saw. I think that investors who use this tool without thinking through the consequences in the next 5 may be the ones getting killed.