Use SFH HELOC to Purchase 12-Unit Apartment?

[Bob Asad]

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]

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!