Picking up Buy and Holds with HELOC? Good or Bad?

[Kuang H.]

Hello BP’ers, I’d like some feedback on a method for buy and holds. I’ve looked around the forum but I haven’t seen anything specifically written about it. I think I heard this mentioned on one of the BP podcasts, but not a whole lot of time is really spent on it.

I’ve played with the numbers, over and over again, and it looks like a plan I am very comfortable with for picking up Buy and Holds at a frequency of one property every 2-3 years. It’s a slow process, but I don’t mind.

The short of it: Acquire a Home Equity Line of Credit (HELOC) (500K-600K). Use the HELOC to purchase properties in full, and refinance 75-80% of purchase, within 6 months to one year down the road to pay down the HELOC. All the while paying the down HELOC with the new rentals projected mortgage and any cash flow, plus cash flow from the other rentals, until the refi happens. Then rinse and repeat.

The long of it: I currently have 3 properties.

1st is my residence with a HELOC (7 yrs remaining) of 200K on a property and no other mortgage. The residence is worth 675K. Owned for 10+ years.

2nd is a SFH I paid in full. Occupied rental and has no mortgage. Owned for 3+ years, worth 145K.

3rd is a Duplex Occupied rental and was paid in full with the HELOC from my residence and has no mortgage of its own. Owned for 1.7 years, worth 220K

I understand that the "short" is pretty vague, because you have to account for a lot of things that go into investing in real estate. Let's assume I am looking into properties that have rents that can sustain Insurance, Property Tax, CapEx, Vacancy, Repairs, Water/Sewer/Garbage, Landscaping, Management/HOA fees and mortgage, AND still cash flows. Sounds great right? It's been harder and harder to find here in the Fresno, CA but I'm patient. I'm also looking into other areas of the country, but that's neither here nor there.

Assuming all that, I plan on using the HELOC (500K-600K) to purchase multiple SFH or one or two multifamilies, functioning like a cash purchase, pay in full for each. Then refi, 6 months to one year down the road, at an amount that would satisfy the mortgage plus everything mentioned above, and still cash flow. Use the cashout refi to pay down the HELOC and the use the collective cash flow to pay off the remainder of the HELOC.

The only down side I can see is if I didn’t do my due diligence, and there was a lot of repairs to be made on the property, or other things, like hiccups that sometimes lurks in the of the title, that could cost me butt load of money. But if I do my homework that will hopefully be to a minimal overall cost. And if the lender calls in the loan early, I can always liquidate the purchased property(s) or get a loan with someone else.

As you may have noticed, I've already started plan in a smaller scale, by acquiring a 200k HELOC on my residence to buy the 3rd property. I have yet to refinance the duplex because I wanted to build up my relationship with the bank for a few extra months. I figured that if they see that I can pay well beyond the minimum payment,

Note: the minimum payment for the current loan is $650ish, all interest only, and that number goes down each month. I am currently paying $3,000/mo for the past 22 months. End Note

I think they’ll look at that history and say, “Yeah he’s been pretty solid on his scheduled payment.”

At this point I've decided it's about time I refi'd on the duplex. The cash I would be able to pull out would pay off the majority of the HELOC. Which would leave me with only 15K to pay off with the collective cash flow. (I'm sorry if I'm throwing too many numbers around that don't make sense, but in lieu of going into the details of the deal, which is not the topic I want to discuss at this moment, I hope you would forgive me.) While thinking of the refi, I rethought my timelines of where I want to be in 5-10 years. I decided I'd rather use the collective equity of all three properties to accelerate my timeline.

Last week I spoke to the bank manager of the institution that holds the HELOC, to see if I can tap into more equity in my residence and the equity of the other two properties. I gave her, my taxes, my current projections, the whole song and dance, and she loved my story. She told me she'd talk to her "mortgage guy" and see what he thinks. The next day the bank manager requested a phone conference with her, me and her guy. We got on the phone and only hang up the mortgage officer could see was my taxes, and I'll need a CPA to go over them so there's more clarity. (I file my own taxes, apparently not very well) Other than that, the two of them told me there shouldn't be any other problems with increasing the HELOC, but we'll see.

SO that’s the crux of it. I mean, it’s a pretty simple plan. I know this is a slow way of expanding a portfolio but I’m okey with that. I have a career that I’m happy with. I’m able to self-manage the 3 units at the moment, but I know I’ll need to hire a PM as I expand. I’d like to hear what you think. Have you done something like this? IS there something better I can do with the equity I have? (Short of selling everything and buying a unicorn). 

Thanks for taking the time BP’ers!

P.S. Seriously, Thank you BP'ers! Thank you to Josh and Brandon for starting this community. I don't think I would ever be as confident as I am in real estate without BP. I thank your staff for finding new and innovative ways of looking at REI and I thank all the contributors on the forums, whom have given me so much FREE education, for without you, I probably would have gone broke with the gurus. Okey, I'll stop, I starting to feel like I'm giving an award acceptance speech. Thanks everyone.