Use SFH HELOC to Purchase 12-Unit Apartment?

Question

Would you recommend doing something like this?

Using SFH primary residence with a HELOC (ex. $425k) to purchase a 12-unit Apartment ($1.5M) with 25% down ($375k from the HELOC).

The remaining $50k from the HELOC could go into fixing/rehab of the 12-units.

Then cash-refinance the larger amount from the 12-units to pay off the HELOC in one lump-sum (as much as possible), then using the cash flow from the apartment to pay off the rest of the HELOC.

Repeat the process with a new apartment.

1) Does this make sense? Any flaws in the thinking or process? Would there be issues with the 30-year conventional bank loan itself for the 12-unit apartment since the down payment is from a HELOC?

2) In a cash-refinance, let's say the new appraised value of the apartments is $1.8M, does this mean you can apply the $300k into the HELOC and not pay taxes? (or are there fees? Aside from the cash-refinance cost itself)

3) Does this mean the new mortgage (30-year conventional for the apartments) be based on the $1.8M with new interest rate (at the time), etc.?

4) Is there any good way to "calculate" the new appraised value ahead of time to know what to fix/rehab?

Jason Wray · Answer

Bob,

A conventional loan is for residential 1-4 units and commercial is the loan term for anything 5+ units or business purposes.  Non/QM is DSCR and DSCR is for up to 8 units with most Non/QM lenders.  Commercial does use Debt service ratios and requires 1.35% in most cases but its not a DSCR loan.   DSCR requires No income, No Taxes and Commercial requires a PFS, occupancy ratios usually above (90%), Credit scores above 720+ much higher assets for (PITI reserves and overall risk, landlord seasoning, and more.

A Heloc can be used in most cases for anything but when you are trying to buy a commercial building which is higher risk, the committee/UW can and in most cases will deny it if they feel you are over extended low assets or with no landlord experience, unless you have a meaty amount of equity to cross collateralize for a junior lien on another property.

Commercial lenders "Must" see rents/DSCR at 1.25% to 1.35% minimum along with your criteria as I mentioned above. Its not just that the rents are good and have a solid ratio...

If you do not have a commerical property or commercial loan as of yet I would strongly suggest you get a few quotes.  Do not let multiple people pull your credit unless they know their own guidelines.  Do not use a loan officer that does not fund 3-5 commerical loans per month.  There are a lot of hungry rookies out there that will collect a "Broker fee" or have you pay for a LOI (letter of Intent) and it's nothing but a piece of paper.

Jason Wray · Answer

Bob,

You might want to re-think that plan if you are going to use a HELOC versus an actual cash out refinance.  Most commercial lenders 99.99% require you to own and have operated a commercial business or 2-3 investment homes prior to a commercial loan of that size.  They also do not use most Heloc's since its "Not" a liquid reserve instead its a debt burden.

A bank does not offer a 30 year fixed conventional loan for a 12 unit commercial purchase.  Anything over 4 units is commercial where DSCR usually goes up to 8 Max in most cases after that its strictly commercial or SBA.

I would strongly recommend getting a pre-approval or a letter of intent before you talk about a Heloc. Have you seen the business financials and previous years rents along with looking at that the banks will want to see its 100% occupied without vacancy to hit a Debt service ratio of 1.25% Minimum in most cases.

If you have any specific questions feel free to reach out I enjoy helping and talking REI!