Anyone experienced using a HELOC?

[Tim Rostro]

Happy Labor Day to everyone! So here's my situation and I'm looking for guidance. My very first property that I've bought, a single family home, is about to be paid off by early next year, April 2020. I'm working on property #5, a duplex in Pittsburgh, PA using my own funds, stocks, mutual funds, and some cash for a down payment. However, with that SFH being paid off, I want to use a HELOC to fund my next property and future properties. Doing my research on the internet concerning HELOC, I can get a loan of up to 80% of my property. This SFH is a starter home and it's worth almost $100,000, so, I'm looking at close to a $80,000 HELOC.

My concern is I'm taking a loan to purchase another loan (HELOC to fund a mortgage) and I still have to pay for both the HELOC and the mortgage for the new property(ies). Of course, I'm going to do my research and make sure the numbers add up to where the rental income from each property can pay for the mortgage and into the HELOC. Paying off the HELOC should be the number one priority which could take several years by which time, I'm not able to receive any income from those properties.

Is this fiscally sound? A loan for another loan? I'm taking a loan to fund another loan. I could go into my savings and investment and cash them out for the down payment and don't have to worry about a second loan (HELOC). However, used in the right hands and not mismanaged, a HELOC is another avenue or tool in which I could tap for capital for major purchases.

Anyone have any experience using a HELOC to purchase investment properties and did it work for you? Or is this something to be avoided?

Thanks.  

V/R, Tim Rostro   

[Andy Madden]

@Tim Rostro I have used this approach to fund the full purchase or down payment for several duplexes and triplexes in Pittsburgh. While it is a "loan for another loan" as you said, if done responsibly it can be a terrific way to grow your portfolio faster than you otherwise could with your savings. Before I utilize funds for my line of credit, I think about the worst case scenario for the property I want to buy, as well as the properties I already have in my portfolio. If I can still meet all my debt obligations and expenses in the worst case scenario, then I move forward with purchasing the property. 

In using this approach of looking at the worst case scenario, consider running a model where you have 50%-60% occupancy in your existing units, interest rates go up 2%-3% over the first 5 years of the loan, and (if there's rehab) that the costs are 25% above what you estimate. If your portfolio can handle these types of occurrences and you can still make your HELOC payment + other mortgages and expenses then I think you should feel comfortable moving forward.