Home line of credit question

[George S.]

I have a question specific to home equity line of credit. I will have 2 properties paid off this year. Total value is 325k. Taking lines of credit against the homes for down payments is often mention. How do new potential banks look at this for rental purchases ?

[Scott Hollister]

Hello @George S.,

Yes, HELOC's are a great way to acquire Real Estate. I just did one with the BRRRR strategy, the 4% was cheaper then the 12% interest only payment with Hard Money. I used the HELOC for the down payment and had HM cover 85% of the purchase while funding the rehab 100%.

To answer your question, they will look at that as a good equity position for you (the borrower). Since you own two houses, they feel "safe" as having the houses as collateral so that you can borrow against against them. 

Things to know about HELOC that I learned:

• Typically banks go up to 80% of the appraisal. Usually they will pay for the appraisal, if it comes back really low then tell them to go back again. (Mine came in 60k less the first one)
• Around CT I found credit unions that go up to 100% LTV, it is more expensive. My advice is to split the difference at 80% LTV between the properties (leaves you 260k which is more than enough to get started) Maybe you only get one to start (depending on how cheap your market is).
  • *Because once you start the process then that 10 year period starts, so if you won't be using one for another year then don't waste your time on getting it. (But it can be a back up and the yearly fees are under $100 for my HELOC) Choose what is best for your REI.
  • If you don't "draw" on the money you won't be paying the interest payment, just the yearly fee. 
• Check with your bank to see if they will do a HELOC on a non-owner occupied house. (I doubt you live in both?) Maybe you can swing a bank line of credit and use them as collateral? Its all on how creative you can be! 
• Typically HELOC's are a 10 year interest only payment, then 15 year repayment after the 10 year mark. Your goal is to rinse and repeat this money as quick as you can netting you returns ABOVE what you're paying for the money. (Factor in your time invested to make sure the return is worth it) 
• If you're just starting I would start with one property, choose the method of investment (rental or flip). This will give you the direction of your rehab. Then you can line up the cash out refinancing for the rental if needed, or sell. Either method you WANT to pull all your money back out. DON'T leave money in the deal. This will allow you to scale up quickly. (Read Rich Dad Poor Dad)
• Call around to every local bank and don't get discouraged by the "NO". Hearing no is part of the game, develop thick skin and move onto the next bank!
• I also heard that having HELOCs on paid off houses looks like you have no equity in the property if a lawyer is looking to go after you. This would be in a lawsuit situation, but your a wise/diligent investor so I don't see that happening:) 

Good luck and keep posting! You will learn so much from all the experts on this site!