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!

[Bob Asad]

Quote from @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!

Thanks for the great information. What are the normal loan terms for a 12-unit if it's not 30 years conventional nor DSCR?

And I was under the assumption that a HELOC could be used for anything without banks asking questions, is that not the case? (Since it's the equity of primary residence)

Wouldn't the bank mostly care about the rental income of the apartment to offset the debt to loan? 

[Jason Wray]

Quote from @Bob Asad:

Quote from @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!

Thanks for the great information. What are the normal loan terms for a 12-unit if it's not 30 years conventional nor DSCR?

And I was under the assumption that a HELOC could be used for anything without banks asking questions, is that not the case? (Since it's the equity of primary residence)

Wouldn't the bank mostly care about the rental income of the apartment to offset the debt to loan? 

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.