Is REI just taking out HELOC after HELOC?

Question

Sorry if this is a rookie question, I'm new to this. My husband and I are looking to take out a HELOC to buy a property out of state. It got me thinking: To get another property after that, would we have to take out another HELOC? Or what to people normally do to buy 3rd, 4th, and subsequent properties?

Scott Trench · Answer

I really don't like this approach at all, and I think that folks who use HELOC after HELOC to finance property will find that real estate compounds financial pressure on their lives, rather than compounding freedom.

Here's an example. Suppose that I purchase a property or $480,000 and after a $360,000 mortgage, I generate $6,000 per year in cash flow (5% CoC ROI with $120,000 down payment).

This makes sense and for some investors, would be considered a "single" or "base hit".

Now, let's assume that instead of bringing cash, I brought the $120,000 down with a HELOC from my primary residence, at an interest rate of 6%.

The interest alone on this HELOC is $7,200. So, right off the bat, I have to bring $1200 per year to continue operating and owning this property.

But, we also, at some point, have to pay off the HELOC. A HELOC is a short-term debt instrument. Even if we assume we will pay off this $120K over 5 years, that's $2,000 per month in principal repayment. $24,000 per year.

Rather than putting money in your pocket, this HELOC financed rental property is requiring you to hustle harder than ever to come up with $25,000 per year to keep your rental, for FIVE YEARS.

While it is possible that at the end of 5 years, you could have a cash flowing asset, that has appreciated in value and amortized the mortgage, those are not likely to be a fun five years, and for me, defeat the purpose of real estate investing in snowballing my wealth and making my life easier and easier, financially, with each investment.

The HELOC, in my opinion, is much more appropriately used as a short-term financing tool. For example, I might use it to fund or supplementally fund a fix and flip project, or a BRRRR investment. For this purpose, it can be a great alternative to private or hard money.

I just sometimes worry that folks who try to get into real estate, and use HELOCs to fund down payments on long-term investments, will find themselves in for a very hard road ahead, especially if the markets do not appreciate the way they did the last several years.

John McKee · Answer

A heloc is only used on your primary residence.  Most investors think they can take out helocs on all their rentals but that is not true.  What I have done in the past is use the heloc to buy the second property with all cash which includes the heloc and some cash that I have in the bank.  Once the deal is completed then I can take my time to put a mortgage on it and pull cash out.   Once I pull the money out of the second property I immediately pay off the Heloc until I'm ready to use it again for that 3rd property.  Now I'm fortunate to have a very large Heloc to do all cash deals but you get the idea.

Stacy Raskin · Answer

@Briana Martin, there are different down payment strategies for future investment properties. Many of my clients decide to pull cash out of their investment property they acquire by doing a fixed rate second mortgage on the investment property if they are looking to access cash and not use down payment options such as savings, etc.

Once they have the down payment (typically about 25% in today's market), If my clients are looking to buy investment properties and hold them longer term, they will use DSCR loans which are loans that don't use the borrower income and are based on the rental income, the down payment and the borrower credit score.

Here's a post where I answered and went into detail about DSCR loans (my answer is if you scroll down near the bottom):

https://www.biggerpockets.com/...

As long as you are able to get the cash for the down payment for the investment property, you have a minimum credit score and you pick the right properties, it allows you to scale up your investment property portfolio.

I'll also send you a message.

Clayton Silva · Answer

Actually we can offer HELOCs on investment properties as well 👍🏼 they are a pretty cool product and can be fixed rate

Clayton Silva · Answer

Great question! A lot of people (myself included) use the HELOC to purchase undervalued properties, put a little work into them and do a form of a BRRRR.  I will typically refinance the property once it is stabilized and get as much of my HELOC back out as possible so I can use it again!  Hope this helps!

Theresa Harris · Answer

It depends on how you use your money.  I save for a down payment and don't use a HELOC.  It is the same with buying rentals were some people do major renos and then refinance or refinance as the mortgage gets paid down.  Others buy and let the mortgage get paid down over time.  Different things work for different people.  Do what works for you.

Jon K. · Answer

You can establish a HELOC on investment properties, not just your primary residence.

John McKee · Answer

The Heloc is the most valuable tool in your toolbox.  Since real estate prices have gone up significantly over the last 5 years, we renewed our heloc early while we still have a W2 income, and we were able to double the amount of equity we have access too.  I'm currently using it to buy a commercial property with all cash and then once I have the property stabalized with a tenant, I will put a traditional loan on it and pull the cash out to pay off the heloc.  Rinse and repeat!

P.S. there are some banks that can do Helocs on residential rental properties.  Heloc rates are variable and currently higher than a traditional loan so just make sure you do the math on your next project.

Is REI just taking out HELOC after HELOC?

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