Using a HELOC for Down Payment on Investment Property

[Melissa Nichols]

Hello,

My husband and I bought a vacation home (2nd home) about a year ago and have been renting it out on Airbnb since January 2017. We bring in an approximate gross profit of $3k per month and a net profit of around $2k. 

We bought the property using a mortgage, and due to the home being mis-marketed, we got it at a steal of $95,900 but the appraisal came in at $125k. After our rehab of the property and the quick upward trend in the housing market in the area, we estimate the home to be conservatively appraised at $165k if we were to have it reappraised.

We're excited by the success of the Airbnb property but want to give a go at long term renting so as to not put all of our eggs in one basket and start to diversify. We're trying to figure out the best option for financing our next property, and our goal is a duplex for no more than $110k + $10k in cosmetic rehab.

We have some cash in the bank/savings, but not a ton (and we'd like to have much of it kept in the bank as a security net). So, we're looking for the best way to finance our next downpayment + rehab costs. Right now, the mortgage on our 2nd home is financed at a rate of 3.5%, and refinancing would bring it up to around 4.625%, so we think we'd prefer not to mess with our current mortgage. And just as a note, we live in San Francisco and don't have a primary mortgage (we rent) so we can't cash out refi on any first home.

The option we're considering the most is to do a HELOC for part of the down payment and also partially use our cash savings. Is this the best option? Is there any reason this would be a poor option to take? We're trying to follow the BRRRR strategy but are not quite sure we want to let go of our current mortgage rate.

Thank you!

[Eugene Rogachevsky]

@Melissa Nichols I'm sure you've already ran the numbers and considered the monthly interest on the HELOC into your cash flow numbers. But since HELOC rates are variable and interest rates could potential be raised twice more this year, take that into consideration when crunching your numbers. The BRRRR strategy is great for a HELOC but only if you're able to pay down the HELOC in a relatively short time. The seasoning period to refi an investment property is typically 6 months from initial purchase close date. So you'll at least be paying 6 months of interest on it plus the interest on the rest of the financed portion. Make sure you're still cash flowing with these things factored in. Also, take into account the closing costs for a refi. Unless you buy 20-30% below retail cost, there might not be a way to come out ahead on the refi 6 months after purchase. I'm all for leveraging but just make sure numbers make sense if you need to keep HELOC out there for 12 months or longer and interest rates go up a point. Additionally, taking a HELOC out on an investment property comes with higher rates than doing it on your primary. So shop around for % and LTV.

Good luck!!