How many home equity loans can I have? I know the limit is 10 for mortgages, but is there a limit on home equity loans?

Question

Hi! Just wondering if there's a limit on home equity loans. If not, and you have like $200,000 cash to start, could you just buy a $100k property, fix it up, rent it out and then get a home equity loan for $70k and repeat as long as you have cash?

Thanks for any help here!

Jon Holdman · Answer

The Fannie/Freddie limit of 10 is for mortgaged properties.  Not mortgages.  You have to have fewer than 10 mortgaged properties to get a new Fannie/Freddie (i.e., "conventional") loan.

You really don't want to use HELOCs for a short term hold.  In your case, the main issue is the short amortization period.  Usually these loans are interest only for some time period, but then have to be converted to fully amortizing over a period that can be as short as five years.   Typically 10 years at the most.  So, while you might have a low interest only payment at first (during the "draw period") at some point it will convert to fully amortizing and the payment will really hurt your cash flow.

Better to just get a fully amortized loan when you do that cash out refi.  Keep in mind those aren't easy to get, either.  Lots of rules for conventional loans for cash out.  Maybe less so with a portfolio lender.

This sounds like you're attempting the "buy with cash, refinance later and get all or more of that cash back."  That worked at one time, but isn't likely to work very well these days.

Realistically, rentals are a cash on cash business.  You may be able to build a big portfolio with not much cash invested.  But you will be overleveraged and won't have much return.  Better to think of this as a snowballing exercise.  Start by buying good, profitable rentals.  Continue to save.  Invest your new savings plus the cash flow from existing rentals to buy the next one.  Buy with long term loans right from the start, assuming your income lets you qualify.

Chris Adams · Answer

If you buy a home with cash planning to hold it as a rental your better off getting a mortgage that a HELOC on the property. I think you'll get a better rate, and the mortgage will force you to pay off principle monthly where the HELOC is typically interest only.

You will also be artificially lowering your cost of ownership by having a I/O HELOC on the house, causing you to think it cash flows better than it really does. And with todays ridiculously low fixed interest rates you lock in your cost. HELOCS are adjustable rates, thus your cost of ownership will go up over time. Possibly faster than rents will increase thus eating away your cash flow.

Roy N. · Answer

@Jon Holdman gives you good advise - as we've come to expect from him.

That said, HELoCs can play a role in building your portfolio, but you need to respect they are lines of credit and not long term financing vehicles.

Fewer and fewer conventional lenders up here continue to offer HELoCs on rental properties, but we do have a couple in place which we will use for quick capital to purchase a property (i.e. cash purchase).  We will then refinance the new property - typically after some forced appreciation and a new appraisal - and pay down the HELoC so it is available for the next acquisition.

Jan H. · Answer

I just signed the HELOC paperwork today for one of our rentals. It was 100% paid off with cash and our local bank opened up a 60% LTV HELOC. I have another rental that is paid off and they said they would only do a HELOC on one rental per customer. They stated that banks differ with underwriting rules and their rule is only one per customer (to not over leverage someone, makes sense).

I am planning to use the HELOC to flip houses and use the profits to buy rentals.

Anyway, I was thinking of going to a different bank to try to get another HELOC for the 2nd property. Has anyone done this before?

What is the best way of getting financing on 100% paid-off properties?

Jon Holdman · Answer

Rates from the one portfolio lender I'm familiar with are only slightly higher than conventional.  The issue is the term.  15 year fixed.  Or longer amortization periods with either an ARM or a balloon.  30 year fixed rate loans are conventional only, AFAIK.  20% down on small properties (1-4), 25% on larger ones.

William Morgan · Answer

Chris: Could you just buy a $100k property, fix it up, rent it out and then get  a home equity loan for $70k and repeat as long as you have cash?

You could, yes and it's not a bad strategy providing you understand the numbers in the deal.  You could buy and fix with your combination of HELOC and cash.  When finished, you appraise and refinance the now improved property with, ideally, only a 1st  that covers your all-in costs and pays off the HELOC plus, depending on the deal. The benefit is you access equity in your property without having to sell it or over-encumber it.

HELOCs can be advantageous for short term transactional financing.  It's a cheap and fast source without all the strings other sources of financing have.    Not sure how many you can have out at once but not all banks do Non-owner Occupied HELOCS - usually high rate and lower LTV.  There are definitely better solutions for long terms financing.

Chris: I heard that after 1 year you could get a home equity loan on the  value of the house, but before 1 year, you have to get it on the  purchase price..

Mostly true with National Banks, NOT true for credit unions or regional banks.  I just secured one after only 6 months of ownership and there were numerous CU's and regionals to choose from.

Roy N. · Answer

Chris,

This is quite probable.  I'm across an international border from you, so lending practices are a little different.  We also tend to deal mostly with commercial mortgages these days which are a little different again.

Lane Kawaoka · Answer

Can your wife get loans 11-20? Any other ideas?

Chris S. · Answer

@Chris Adams Thanks for the advice Chris.

@Jon Holdman   Jon, thanks a lot for the info (as usual).  What are typical terms of loans once you get past your 10 buy and holds?  I guess I'm more worried about that b/c it's unknown.. Thanks!

@Roy N.  When you force appreciation and then refinance, from speaking with a mortgage broker, he told me that they can only refinance on the amount that you bought the house for.  Unless... you wait 12 months and 1 day.. then they'd take the reappraised value in to account in mortgaging the property.  Any insight on this?

Thanks Everyone!  Chris

Chris S. · Answer

** I heard that after 1 year you could get a home equity loan on the value of the house, but before 1 year, you have to get it on the purchase price..

How many home equity loans can I have? I know the limit is 10 for mortgages, but is there a limit on home equity loans?

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