HELCO to cash buy and then refinance?

Question

Hey BP!

I came up with this thought today while listening to a BP podcast and I wanted to run it by some members more experienced then myself to see what they think. I'm trying to kill two birds with one stone here so I hope this makes sense. My mother is pretty financially strapped, she has enough to get by but not enough to live how she would like to. Unfortunately she was severely injured in a car accident we were in when I was a child years ago and hasn't been able to work since. I'm thankful everyday that she pulled through and is able to live a fairly normal life. She has always been a great support system in my life and I'd love to find a solution to give back to her without stunting my business growth. Since her accident, my parents also divorced leaving her with only alimony. The one thing she has going her way is she has a beautiful house that is completely paid off.

So now that you have the back story here is the basic Idea. I have a specific property in mind so I'll plug those numbers

My mother takes out a HELOC on her home

I use the money to cash buy a good deal under retail value (estimating 110k)

I use a small amount of my capital to make some improvements on the property (estimating 5k)

I then take out a loan on the house to repay the HELOC and give my mother some money for being my private lender (ARV 150k) I'll owner occupy the property and potentially use my VA loan to receive 100% of the appraised value.

Nothing too complicated. The thought is that we both get something we want (solid cash-flowing property for me and cash for her)  I also want to provide minimum risk for her. I figure the renovation process should be quick and the HELOC should be paid back between 2-3 months. The real question is will she be able to qualify with minimum income? Also, if not, could I cosign so that she can be approved? I have absolutely no experience with HELOCs. I'm reaching out to my lender during business hours today but I'd love any feedback on the idea or the HELOC process from other investors. I've been running some options through my head so I thought I'd throw this out there. I'd also love some feedback on the amount I should give my mother. I tend to be way to generous with friends and family and I'd like to take the emotion out of it. If everything works out well I'd hope to rinse and repeat to produce income for both of us. Let me know what you think!

Brian Ellis · Answer

I think it is a good idea if done right. I used a HELOC on my primary residence for a down payment on a duplex. I did have to use a conventional loan so im looking at another 3 months before I can cash our refi (6 months total). You would have the advantage of refinancing sooner and paying off the HELOC quicker with a cash sale.

I would give the lender your mothers credentials prior, and see if she would qualify before making that decision. It really depends on your mothers debt to income ratio. Break down the cost of the house, and what the ARV is going to be. This way you have an idea of what the loan to value is going to be.

Steve Vaughan · Answer

I'm by no means a borrowing/lending expert (I go years without borrowing from banks at all), but I have a couple thoughts on your plan.

It's admirable you want to help your mom. Sounds like she's been through a lot.  I would suggest helping her buy and take care of a rental, not your future house. Then she can have an asset and cash-flow without the risk of just going into and staying in debt.

Say the VA allows you to do this?  I highly doubt you will be able to, but say you do and pay off her Heloc and give her a little interest.  She now has access to this large credit line, but no asset or cashflow? That could be dangerous for most normal people.

I'd help her obtain a rental or investment but buy my own house arms-length.  Won't hurt for her to see if she'll qualify for a Heloc, but keep your own RE separate.  Cheers and good luck!

Account Closed · Answer

The whole point is to find a way to make my mother money lol I can do 2 deals in the next few months without her. I'm trying to find a simple way for her to earn some money with minimal effort

Account Closed · Answer

Thanks for the feedback @Brian Ellis  Thats a great strategy. I have 3 unit that I am wrapping up a renovation on and I'm debating between doing a HELCO or a cash out refi to purchase a future property. Why did you choose the HELCO? I'm assuming its because you didn't want to raise the rate on your existing loan and plan to pay it off when you refi the duplex? What LTV were you able to get?

@Steve Vaughan At any point in time you can use a VA loan for 100% LTV. Even for a property that a person already owns they can Refi back to 100% LTV even if the property was not currently on a VA loan. By doing this I can pay back the HELCO almost immediately and her debt is cleared. At this point I can give her a %. Also the property is not my future home, temporarily maybe but this is only temporary means of financing so I can leverage the extra cash into a down payment on another property. I don't think that helping her buy a rental property is a good idea. She is out of state an I would have no over sight at all. Seems like a huge head ache to learn her market and then help her manage it out of state. If I could consistently repeat this process its just as good as cashflow for her and she doesn't have to worry about managing a property.

HELCO to cash buy and then refinance?

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