HELOC pros and cons discussion

Brian Bennett · 2021-11-10T05:45:23-08:00

There hasn't been much talk lately about using your home equity as leverage so I wanted to start a new conversation. I almost feel like I could be missing something. Is this not a good idea or is it just not that popular... My plan is to get a HELOC and use the money to purchase two lower priced rentals. With an interest only payment being very low, I intend on using the balance of the rental income to pay down the principle. From everything that I know in this early stage, it feel like a winning plan to me. Do you have any thoughts or insights that I might be missing? I know this is a very simplified explanation. These units already have property management, and tenets. I understand that I need to keep money aside each month for the big ticket items that will need to be replaced. I'm excited to hear your thoughts and will be more excited to hear that this posts sparks ideas or opportunity for anyone else. Thank you

Drew SygitBusiness Member

Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes

4y

1) What will you do for reserves to cover the inevitable surprises?

2) What happens if interest rate spike and your lender caps your HELOC and auto-converts to fixed rate loan - resulting in a higher monthly payment? Happened a LOT in 2008-2010

3) Of course, this is all assuming you can easily find the, "two lower priced rentals"! Guessing these won't be Class A properties, probably not even Class B. There are lots of problems with Class C properties & tenants that will blow your nice spreadsheet projections out the door!

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Mike MoseePro Member

Investor · Eagle Point, OR · Member since 2011 · 181 posts · 118 votes

4y

Use the Heloc to purchase & then refi properties to pay back the Heloc. The Heloc can then be used as your emergency fund until you build up set aside funds from rental income. Use the Heloc only for the rentals & the interest is tax deductible.

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Brian Bennett

OP

Real Estate Agent · Peachtree Corners, GA · Member since 2021 · 11 posts · 6 votes

4y

Originally posted by @Drew Sygit:

1) What will you do for reserves to cover the inevitable surprises?

2) What happens if interest rate spike and your lender caps your HELOC and auto-converts to fixed rate loan - resulting in a higher monthly payment? Happened a LOT in 2008-2010

3) Of course, this is all assuming you can easily find the, "two lower priced rentals"! Guessing these won't be Class A properties, probably not even Class B. There are lots of problems with Class C properties & tenants that will blow your nice spreadsheet projections out the door!

Hey Drew, thank you for the reply. For your first question, I do intend on keeping money aside to handle those issues, thats a great point. Until I get a balance built up, I will have a good bit of back up money already set aside.

I do believe that I will have a fixed rate but I will be sure to double check that.

Lastly, I live in the Atlanta GA area and prices are higher than my surrounding towns. My plan with lower priced rentals is just that I will be buying outside of the metro area so I wont be working with the inflated city costs.

Thanks for the help.

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Brian Bennett

OP

Real Estate Agent · Peachtree Corners, GA · Member since 2021 · 11 posts · 6 votes

4y

Originally posted by @Mike Mosee:

Use the Heloc to purchase & then refi properties to pay back the Heloc. The Heloc can then be used as your emergency fund until you build up set aside funds from rental income. Use the Heloc only for the rentals & the interest is tax deductible.

Hey Mike, thanks for the help! I'm not sure if the tax deductible factor was in my mind before this. I will surely bring that up with my accountant.

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Brenden MitchumBusiness Member

Rental Property Investor · Atlanta, GA · Member since 2019 · 1k+ posts · 872 votes

4y

Hey @Brian Bennett

Just had a client do exactly what @Mike Mosee mentioned. Essentially, the downside to a HELOC is that you're paying a rate higher than most purchase loan products out there. The solution, of course, is to purchase with the HELOC and immediately refinance. Now, you can essentially purchase with cash but still use leverage soon after. Then, you pay off the HELOC and rinse and repeat or leave it for reserves. As long as you have the $$ (outside of the HELOC) for 20-25% down, you can keep on buying houses, cash, with this strategy.

As you've already realized, you biggest roadblock here will likely be just finding a decent deal here in Atlanta. As we move into winter there has been an uptick in foreclosures but there has also been a decrease in overall supply so I've yet to see a loosening of the market for investors. Like many of my clients, you're going to have to get creative!

Please, feel free to reach out anytime if you have other questions or just want to chat!

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Kerry BairdPro Member

Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes

4y

HELOCs are harder to find for investment property. There are lenders that will do them, to be sure, but the easier way to proceed is on an owner occupied house. That said, we put our homes at risk with the higher debt service.

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HELOC pros and cons discussion

HELOC pros and cons discussion

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