Tapping a HELOC for an 8-unit building

[Kathy Henley]

A first class rehabbed building looks interesting. Is it the best use for our money? It would be a step up from our 4-family in both size and location. The location is in the Central West End of St. Louis, where the young professionals live; close to two universities; class A. The property has undergone complete renovation. Here are the facts: List price is $729,000, 8 units, 2 2-bedroom and 6 1-bedroom units. Gross monthly rents: $7545. Property tax $5,287. The seller's number look good because 25% expenses are used to show a delicious NOI. My BP analysis lays out more details. I went light on the vacancy rate (5%), and the usual 10% for CAPEX and 10% repairs (old building) and 10% PM, less the property tax, common utilities, and insurance.

It may cash flow $1185/mo.

It shows a 1.49% debt coverage ratio, which my commercial lender will like.  The commercial loan may be 20 years at 4.5%.

We are considering using our HELOC of our primary home in California for the 20% down payment, $145,000. The interest expense, of this borrowing, is included in the above calculation at $425/ mo. What dangers might there be in this transaction?