Possible to use someone else's HELOC as private money?

Question

Hi everyone,I'm currently trying to figure out different ways to finance my first deals, and private money seems to be a great option. However, due to the fact that I'm just starting out, I don't exactly have an extensive network of individuals waiting in line to lend me their money. My parents have a considerable amount of equity in their primary home as they've been living there for well over 20 years, and I was wondering if it was possible to (potentially) have them take out a HELOC and allow me to use that as a private money loan provided I pay it back within a year or two? Or if I were to use a HELOC as a way to invest, does it have to be from a property that I own personally? Has anyone successfully done this? I also feel it's important to mention that I'll be using that HELOC loan and implementing the BRRRR strategy, likely on a small multifamily home/ very small apartment complex( less than 10 units). I'd be raising the value, refinancing and paying off the loan within a year or two. I understand there's a big difference between commercial/residential properties, but I'm just curious if using this strategy in general would be at all possible. Any insight would be appreciated, thanks everyone!

Stephen Brown · Answer

@Brennan Doherty IF you are comfortable with having your parents put their house on the line and IF your parents fully understand that they are putting their house on the line; I would suggest setting up an LLC to purchase and having your parents LOAN the money to the LLC before the purchase happens, with the promise that it will be secured by real estate as soon as you have a property. Then the money is sitting in the LLC account. You can pay their payments out of the LLC. Seasoning is not always an issue with commercial loans (over 5 units). You will probably have to sign personally on the loan whether at the beginning or at refinance and the bank may want to have someone with a higher net worth on the loan as well. IF you can buy the property with all cash, that would make refinance a heck of a lot easIER. And I cannot echo @Chris Jensen loud enough. Don't buy a property and assume you will be able to refinance all the money out of it. Buy the property after getting pretty hard bids on the rehab costs, and then aim for 70% of the expected ARV (NOI/Cap Rate (which a commercial broker can help you find out for the area)). That 5% (75%-70%) will go away quickly in closing costs.A two year repayment may be a little quick, so I wouldn't promise it. Personally promise to make the HELOC payments. Plan on refinancing as soon as your ARV allows for a proper rehab. If the economy gets a little sahky then your projection won't materialize.Most parents will say "Sure honey, anything you want. I know you wouldn't do anything wrong." And it's true you wouldn't do anything wrong - but you don't control the economy, the tenant traffic, the management company decisions, or the a myriad of other things. Make sure your parents know the risk. AND MAKE SURE YOU PERFORM FOR THEM, NO MATTER WHAT.I know there are smarter and more experienced people out there than me, so please chime in.

Andrew Goduco · Answer

@Brennan Doherty- Hey Brennan, Just wanted to follow up to see if you ended up using your parents HELOC and how you went about doing it?...I'm looking to do the same thing just want to make sure I cover all tax implications etc...Also, anyone else want to chime in I would love to hear feedback... Hypothetically speaking I too am looking to do a BRRRR with half my money and half my parents HELOC. What are the tax implications (on both sides) if my parents got a 200k HELOC and had it deposited into my checking account then I purchased say a $400k property with half my money and half theirs?Thanks,ANdrew

Chris Jensen · Answer

@Brennan Doherty using your parents HELOC to purchase the property and your own funds to do the rehab is a great way to start. Being a cash buyer often helps bring the price down a bit if the seller knows they can close quickly. It opens up possibilities for you to buy foreclosed properties and auction properties, many of which don't accept financing. It may be more difficult to find additional financing if they don't feel comfortable covering 100% of the purchase price, but definitely check around because you never know. I won't pretend to know all the different options available to you, but there are many to explore.For your BRRRR strategy, you'll want to make sure that your all-in cost (purchase price, rehab costs, holding costs, etc) is no more than 70-75% of the estimated ARV (market price after all rehab is complete). This is because your bank will require you to have 20-25% equity in the property after you refinance. You'll read all about that in various BRRRR books and forums. Staying as close to that 70-75% mark will ensure you get most if not all your parents and your money back. Then you can turn around and do it again. That's the beauty of BRRRR, assuming you find the right deals.I hope that helps.

Brennan Doherty · Answer

@Chris JensenHi Chris, thanks for the reply.I'd likely be using it to cover the entire purchase price, or atleast for a portion of it, depending how much they would feel comfortable with lending me. If that's the case, I'd be utilizing another private lender to make the deal work. Unfortunately I know you can't use someone else's money as just a down payment because the bank will want to know where it came from and how you plan to pay for the rest as far as I know, and seeing as I'm 21, I doubt I'll be able to explain how I managed to get my hands on a couple hundred thousand dollars. I'd then use my own funds to cover any renovations/improvements to push the value up a bit, which I WOULD be able to afford, and I would then refinance to hopefully pull most of that cash back out. Do you think this seems possible/like a good idea?

Chris Jensen · Answer

@Brennan Doherty, I've not done what you're asking about, and others may chime in, but here's my two cents. Your parents can use their HELOC funds however they want, but they'll want to be aware of the associated tax consequences. It really depends how it fits into your purchase plan. If you plan to pay cash, and all funds come from your folks, full steam ahead. If you plan to finance the purchase and use some of their funds as a down payment, the requirements of the financial institution will determine what can/can't be used as source of funds. There should be plenty of good options. Good luck to you.

Jack Bailin · Answer

@Brennan Doherty @Andrew Goduco Hey guys, just chiming in here to see if any of these tax implication questions about this financing plan have been figured out, as I have the same idea for my next purchase. @Stephen Brown The idea of loaning the HELOC funds to a formulated LLC is a great idea, thanks so much for that input. Do you happen to know what the potential tax implications would be with this plan for the originator of the HELOC (In my case, my mother)?Best,Jack