HELOC strategy advice?

Question

Hi all, I am new to the BP community and want to leverage your opinions on investing for passive income using a HELOC strategy. Currently, I have an investment property that is paid off and can potentially take out ~80k of HELOC on the property. I've read a lot of posts on people utilizing their HELOC to buy new properties and it seems like a great idea, although I'm entirely new to this approach.

The problem I seem to have is that I also owe 360K in mortgage on my current property and have monthly mortgage pymt of 3K/mo. which doesn't leave me much room for any additional savings. In my situation, how do I use the 80K in equity effectively if only the rental income would be used to pay down the heloc?

I'm currently interested in some properties in TX that goes for around 250K and yields ~1.5k in rental income, but that would require me to take out also take out a conventional mortgage on top of the HELOC and the math might not work out. Is it possible for me to get in the game with my situation?

Hope to get some insights from anyone who might have had similar experiences or are willing to share their expertise!

- Wei

Account Closed · Answer

couldnt he for arguments sake buy something with heloc..lets say a 80K what he gets approved for..and then in 6 month slap a traditional mortgage on it taking all his $ out?

Mike Dymski · Answer

I would not recommend short term debt to finance a long term asset (unless its a value add).  Better off putting a conventional loan on the paid off property.

Ivan Barratt · Answer

@Wei Li 100% (pun intended!) agree with @Mike Dymski! "Don't bet long with short term money" as the saying goes!  Traditional new mortgage with no "cash out" restrictions is probably the way to go however...

Debt is a tool much like any other. Use it effectively and good debt will allow for bigger success. Use the tool unwisely and it will be disastrous!  At a young age I learned that lesson the hard way. :)

Take a deeper dive on your real estate finance (creative and traditional) education.

All the best on your journey!

James Wise · Answer

You've got to look at it this way. If you borrow $80k on a HELOC & then borrow the rest from a traditional lender you've got zero cash into the deal. You are in a deal that's 100% financed. In today's market you should not expect to cash flow on any deal that is 100% leveraged. Just ain't gonna happen. If you run into people telling you that you can cash flow on 100% financed deals they are about to position you to buy their book or coaching product.

Now that that's out of the way the question becomes is a 100% financed asset a good buy if it doesn't cash flow? Is it a good buy if it's cash flow negative? The answer to both questions is YES! Yes it's still a good deal. Remember the rental game is a long term play. They aren't making any more land. This is the best gig in the world. You are borrowing money to buy an irreplaceable asset & then having someone else (tenants) pay off the assett for you. Can't go wrong.

Basit Siddiqi · Answer

@Wei LiYou will not find 1% deals in NYC(monthly rent / purchase price). However, you may be able to find a 1% deal within a 2-3 hour drive of NYC. If you are stuck on New York. You can try looking for some areas in upstate New York.I know some people from NY who invest in Texas. However, be aware that you will be paying high property taxes and potentially high income taxes if the net rental income is positive or if you decide to sell the property without a tax deferral tax strategy.

Russell Gronsky · Answer

@Wei Li, yeah, you are probably stuck with that 3K/month mortgage. That's a low rate. You probably won't be able to buy the rate down far enough to give you any kind of significant relief on your monthly payment.

A refi to lower your interest rate is no good either because your rate is so low already.

If you have paid down that 360k loan a significant amount, you could recast the loan. That just means you take your current principal owed and re-amortize that amount over a new 30-year term. Lenders let you do this with some kind of big payment like 5% or 10% of the existing principal. That might be worth looking into for you.

Otherwise, you'll need a way to generate cash so you don't have to take on so much debt. Hence, I recommended you look into being a private lender or become a hard money lender.

I also recommend you start attending RE meet ups and talk to seasoned investors there who might have other ideas for you.

Braeden Cook · Answer

@James Wise

Not to hijack the thread, but you mentioned a 100% financed property not having a chance to cash flow. I’m looking to potentially house hack a small multi family with an FHA loan, probably 3.5% down. Obviously I would have to run the numbers to make sure it works, but that’s almost 100% financed so I’m just curious about your thoughts.

Also curious about why you feel a negative CF property is still a good buy. Are you banking on future appreciation?  It seems that most believe you should buy a CF property and let the appreciation be the icing. I’ve read enough of your posts to know that you know what you’re doing, so just wanting to get a better understanding. Thanks!

Wei Li · Answer

@Russell Gronsky, my interest rate is rather low @3.5% 30 yr fixed. Its actually the escrow that is almost $1k/month (the mortgage is on a property in NYC and property tax is pretty high).

Can you clarify on how to potentially decrease my monthly payments?

Russell Gronsky · Answer

@Wei Li, your 3k/month payment seems high for $360k. What's the interest rate on that? You might need to refi or buy down your interest rate. You might also be able to recast your loan if you have enough equity and that can drop your monthly payment much lower.

An alternative would be to get into lending on that HELOC amount.

HELOC strategy advice?

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