Any issues using a HELOC to purchase another duplex?

Question

Hey BP- I am currently living in a duplex (doing my best House Hack like@Brandon Turnersays) and I'm looking to purchase an REO duplex in West Chester, PA. The purchase price I'm aiming for is $180,000 and I should need ~$45K with closing to get to closing. I'm willing to throw in my agent's fee (~$5K) plus cash to put down 20%. The major chunk of that $45K will come from an appraisal and a HELOC on my current duplex- which should bring between $20-25K.

Does anyone have experience using a HELOC to purchase another property? It would be my primary residence. Could their be any issues with using that loan as a downpayment?

Thanks all!

Does anyone have experience using a HELOC to purchase another property? It would be my primary residence. Could their be any issues with using that loan as a downpayment?

Thanks all!

Rich O'Neill · Answer

@Christian BeyerSounds great. Let's touch base on Monday. Mid day and afternoons are best for me.

Jessica Wise · Answer

It's a big bank. US Bank. We do have great credit as well.

Christian Beyer · Answer

Hey @Rich O'Neilllet's get together sometime next week and discuss details. It'd be great to get another set of eyes on this.

I spoke with hard money and he is ok to cash out early if the renovations only take 6 months, which reduces my cost of debt by $14K. He will refi out at 85%, and now I just need to propose this to the bank.... and get it accepted.

@Jessica WiseI am having trouble finding someone to do 90% LTV. Did you use a local or a national bank?

Rich O'Neill · Answer

@Christian BeyerAnother option might be the Fannie Mae Homestyle loan. I am using it on my property now. That is a single so I am not sure if the numbers are the same on a Duplex or even if they can do it but it is worth looking into. It writes up just like a standard mortgage but they write the note on the whole project cost. They need 15% down for investors and a lot less as a owner occupant, if you still want to go that route. Here is the link to their underwriting guide: https://www.fanniemae.com/content/fact_sheet/homestyle-renovation-product-matrix.pdf

Other option is to purchase with conventional financing and use the HELOC for reno funds.

All the Hard Money guys I have talked to will only lend up to 65% of the ARV, which leaves you about $20k short. I think hard money should be a last resort and usually works better on lower priced homes.

Christian Beyer · Answer

Hey Rich I'll forward you the info for the April meeting sorry I couldn't get back to you soon enough. The meet up went well, we definitely had some good participation and people from all over.

I'm now looking at this as a rental, and using hard money to buy and renovate and using the HELOC as my fallback funds should I need cash to close out and pay back hard money. Looks like this:

Purchase target: $170K

Renovations: $50k

ARV: $310K

Should be able to refi and pay back Hard money (approved that purchase price and refi) but that loan would cost me $30k at 12% and 3 points for 6 months. I'm thinking I would need someone to lend on 90% ARV to refi. Going to try to offer this to the bank currently holding the non-performing note. Thoughts?

Rich O'Neill · Answer

@Christian BeyerThanks for the invite! What time is it? I have a meeting in North Jersey around mid day so I will have to see how long that goes and when I get back. WC is definitely pricey so I am looking mostly in Delaware county by the airport. I have seen a bunch of deals that make sense but I didn't have the cash available. The prop I currently have under agreement is going to be all in at about $50k and cash flow about $300 a month. I think I can scale faster with the cheaper properties like this than with the more expensive ones like WC. For a primary though, you can't beat WC. I grew up here and love it.

Aaron, does the purchase financing lender on the new property consider funds from a HELOC equivalent to cash? What is your interest rate on the HELOC? Is it amortized like a standard mortgage or is it interest only? Do they have any closing costs associated with setup? Sorry for the ton of questions. Really curious about the pros and cons of HELOC vs refi as I will definitely be doing one or the other soon.

Aaron Howell · Answer

I've used HELOCs several times to purchase new properties.  I used it first in 2012 and my equity line has expanded over time and I purchased in 2014 and then in November 2015 again.  The bank should work with you to increase your line as you get more equity.  Its a great tool in the toolbox to use.

Brad Saari · Answer

Christian, this is still in the very early stages but it does appear possible. I'm still working out the details with my primary lender. They are working to find a secondary lender that will go 90% LTV on the HELOC.

So the line of credit looks like this:

$700 is what I think the property will appraise at

90% LTV

$512 is the loan balance

(($700 *.9)  - 512) = $118k (for down payment and closing costs)

I am assuming this approach will not get me the best rates in town but you have to love no money down.