Using HELOC as a downpayment - how should I look at my returns?

Question

I'm getting ready to buy my first place, a 2-flat, and I'm curious how I should look at my cashflows since I'm using a HELOC from my primary residence as a downpayment. If my CF on a monthly basis is enough to exactly cover my monthly HELOC payment this still seems like a victory to me since I"m not actually putting any money into the property. However, do I look at this as a 0% return since I'm not actually putting any money into my pocket? Should I be looking at the HELOC payment as a monthly expense and include that in my NOI calculation?

Joseph Konney · Answer

It's hard to tell if you have budgeted for repairs, capex, vacancy, etc. I would definitely include your HELOC payment as a 2nd mortgage payment for your NOI. In my opinion, unless you are very bullish on the appreciation factor for this particular property, I would steer clear of negative or break even cash flow properties as it allows no room for error in your forecast. I prefer investing for cash flow personally. I agree with @Oleg Shalumov on having reserves ready. My last eviction in Cook County took nearly six months from start to finish. Then I had to fix their mess and it took time to fill the vacancy again. I advise to go above and beyond to vet your tenants - especially on your first property. If you have existing tenants, be sure to document their identity and employment information in case you need it.

Sam Shueh · Answer

the interest or payback from HELOC is part of the mortgage.

Joseph Konney · Answer

I don't think anyone is suggesting not to use OPM, but only do so when it makes fiscal sense. If your borrow OPM at 5%, you still take to make that back on your investment and then some. If you break even on expenses and have no CF, I would re-evaluate. Sure, you are gaining some equity every month, but IMHO, risk > reward with no cash flow.

Jeff Kehl · Answer

@Josh Shneyderov people like to confuse these calculations a lot for various reasons but it is very straightforward. How much cash did you put in and how much cash did you receive(put backin ) over time. Do it by investment and where the money came from has absolutely no bearing.

Kyle McCorkel · Answer

I don’t like using a HELOC as a down payment, assuming I am paying close to market value for the property. That money is tied up indefinitely and you might paint yourself into a corner (best case) or put yourself in a tough situation if/when rates go up.For this reason I am only using HELOCs as short term financing for BRRRRs and flips. In this case you are adding value to the asset and leaves you with more exit options and better cash flow.

Jason G. · Answer

It is a monthly expense. If you are not cash flowing after that expense I would re-evaluate the purchase. Don't forget that HELOCs are adjustable rate and that rate typically goes in one direction over time. Insurance and taxes generally go up with time as well, so just be careful with the numbers. If the property you are purchasing isn't in a market where rents are expected to rise you may end up in the red in a few years very easily.

Brian Metz · Answer

Hi @Josh Shneyderov, I'm doing something similar, where I'm pulling equity from a previous rental property via a HELOC and using that as a down payment for a property I'm hoping to put under contract shortly. Because I'm pulling from equity in my rental that can support it, I'm counting that expense under that rental, not the unit that I'm making the down payment for, if that makes sense. Not sure if that's entirely correct, but I'm running it that way. Hope it helps and good luck! Cheers, Brian

Oleg Shalumov · Answer

Hopefully you are getting more from the property then just covering your monthly HELOC payment, but i would include it as part of my monthly mortgage payment. You could look at it as mortgage company covering 100% of the finanacing for calculation purposes. As with any HELOC be careful with not stepping over the limit, and have savings for a few month to cover if the rental units is vacant - specially is the rental is not providing extra cash flow.

Josh Shneyderov · Answer

Thanks for all the responses and advice everybody. So to clarify, it sounds like I’m better off actually investing my own saved funds as a down payment as opposed to the HELOC. I guess my confusion is that it seems to me using somebody else’s funds to finance 100% of the purchase is better than using my own saved funds even though the math makes it look better from a CF perspective. I get that CF is the goal but if I use a HELOC it essentially is a monthly payment over time for the downpayment. And since I’m not using any of my own $$ any CF should appear as an infinite return. Perhaps I’m just looking at this the wrong way and overthinking this??