Get rolling with HELOCs

[Mike Chira]

I'm in the process of buying my first property cash at foreclosure (closing in few days), and my goal is to get as many properties for rent as soon as possible. I read a lot and here is what I understand that would work best... if anyone has a better/quicker way, or if what I'm planing doesn't make sense, please advice me...

1. I purchased my first property for 75k. Rehab cost 15-20k, ARV 155k. Total in 95k cash.

2. If property gets appraised at let's say 150k after rehab, open a HELOC ASAP for about $105k (70%)

3. Rent the property for $1400.

3. Find another property at let's say 60k. 20k in Rehab and ARV 100k. Total in 80k cash.

4. Use the HELOC to buy the 2nd property.

6. Since I have a different stream of income, I can use the profits from my first property and start paying the HELOC.

7. After 6 months, cash out refi on my first property. If appraised at 150k, loan should be $112k

8. Pay the HELOC (80k - 6 months of rent on first property) let's say 74k.

9. Now I have (112k-74k) $38k + 105K HELOC = $143k

10. Meanwhile I get my second property ready for rent (which is paid in cash).

11. Now with the 143k I can buy 2 properties...

12. Put all my profits from the 1st and 2nd property into HELOC

13. In 6 months refi the second property and pay the HELOC. How I have 2 properties that I have mortgage on, and 2 payed in cash...

14. RINSE AND REPEAT.

If everything I said makes sense I got another question.

Can I use the HELOC on my first property to buy the rest? Or after I took a mortgage on it I can't use the HELOC anymore and I need to open another one on each of the properties one by one?

I understand that after I get a loan for each properties they should still cash flow, and if they're no I will sell them after 1 year of rent so I can take advantage of the long therm capital gains. And best way would be to do a 1031. Or if I don't do the 1031 I should do a cost segregation study on the next property to avoid taxes.

[Jaysen Medhurst]

A lot going on here, @Mike Chira. 

You can have both a mortgage and a HELOC on a property, but the total LTV is going to be capped at 80% for an investment property. So if you buy property #1 in cash and then have $105k available through a HELOC after renovations, you can continue to use and recycle that money on subsequent deals.

A 1031 exchange is a great tool, but don't underestimate the effort required to do one. You have to identify a replacement property within 45 days of sale AND the new property must cost as much or more AND you have to put all of your gains into the new property. That can be a lot of work to save a relatively small amount of money.

Cost segregation doesn't really make sense for properties <$300k, since the cost to do the study doesn't justify the accelerated depreciation. This is changing, though, as technology improves. So, when you're ready to consider it, who knows? Just don't count on it being a viable option.

Lastly, taxes aren't avoided, they're deferred. This is an important distinction.