Using HELCO to purchase another property

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Using HELCO to purchase another property

Troy Yates
Member since 2022 · 1 post · 1 vote

Hello, new here so this might be basic or stupid. 

I have two STR properties and trying to continue to grow, I was able to secure a HELCO on one of them and was thinking of using it to buy another STR.

The cash flow is there to cover the interest and principal on the HELCO so the added cashflow from having another property would grow my bottomline overall I believe (please tell me if Im wrong). 

I know many say to do a cash out for this but both of these rentals have sub 3% rates so it seems silly to refi now at a 5-6% rate. I have also owned both for less than a year.


So my main question is, is it smart to use a HELOC for this purpose? It would likely take several years to fully pay it back, is this a common strategy for growth?

I have the one HELCO now and would likely be able to obtain another from my 2nd rental as well. As mentioned Im still new and really trying to grow while asking as many questions as possible to be smart in the process! 

Thanks! 

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Nathan Grabau
Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
4y

HELOC is the right move on a sub 3 rate. One thing that people do not realize is that when you refi into a higher rate, your amortization calendar gets worse too. You actually pay less every month towards principle.

A 200k 30 year loan at 3% will have a payment of 843.21, in the first month, 343 goes to principal 

If you were to cash out 100k, taking the loan to 300k at 6%, your monthly payment jumps to 1798, and even with the higher loan and payment, your principal on your first payment is 298, $45 lower

This is what make's the HELOC a no brainer for me. Even if the HELOC goes to 9%, on interest only for 100k this is 750 a month. When you add the 843 to 750 you get a monthly payment of $1593 total, $200 cheaper than the 300k 6% loan, and you are paying down an extra $45 a month

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  • Chaz Allman
    Knoxville, TN · Member since 2018 · 5 posts · 2 votes
    4y

    @Troy Yates I have been thinking about this for the past 48 hours myself. So hard to give up that sub 3% rate and refi unless there was a just too much equity to be sitting there. Just my .02

    Following to hear others thoughts!

    1Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    4y

    It seems to me that this will be more likely scenario for many, either with HELOC or with a second mortgage. And I am guessing that a lot of homeowners will stay put instead of selling, for a similar reason.

    0Reply
  • Nathan Grabau
    Realtor · Longmont, CO · Member since 2021 · 577 posts · 631 votes
    4y

    HELOC is the right move on a sub 3 rate. One thing that people do not realize is that when you refi into a higher rate, your amortization calendar gets worse too. You actually pay less every month towards principle.

    A 200k 30 year loan at 3% will have a payment of 843.21, in the first month, 343 goes to principal 

    If you were to cash out 100k, taking the loan to 300k at 6%, your monthly payment jumps to 1798, and even with the higher loan and payment, your principal on your first payment is 298, $45 lower

    This is what make's the HELOC a no brainer for me. Even if the HELOC goes to 9%, on interest only for 100k this is 750 a month. When you add the 843 to 750 you get a monthly payment of $1593 total, $200 cheaper than the 300k 6% loan, and you are paying down an extra $45 a month

    3Reply
  • Adam Wigdorski
    Rental Property Investor · NY · Member since 2017 · 132 posts · 90 votes
    4y

    @Troy Yates

    I personally use helocs and/or commercial lines of credit instead of refinancing.

    You usually get the same ltv

    Closing cost are cheaper.

    More interest only options.

    If you have a preferred fixed or 5 year lock in rate it can also save you money.

    Just make sure you pay it off!!!!! Or you can lose two properties

    0Reply
  • Troy Zsofka
    Investor · Hillsborough, NH · Member since 2015 · 137 posts · 126 votes
    4y

    Make sure you understand the terms of the LOC.

    I have one that is cross-collateralized by a few rentals that I use for cash flow purposes and it must be paid down to zero for 30 days once per year. If I don't, the terms are such that they can freeze it and convert it to amortizing. Not a huge deal if your intent was to pay it off over time anyway, but make sure you are aware of all provisions.

    0Reply
  • Earl CohenPro Member
    Washington, DC · Member since 2018 · 5 posts · 1 vote
    4y

    Troy,

    I am assuming you are taking out the HELOC to get money for a downpayment for the new STR #2. If that is the case, have you considered if the seller, or bank would allow you to pledge or cross collateralize your "equity-rich" STR #1 in lieu of a typical cash downpayment. This may be possible if the Lender for the new property and the property you already have the 3% loan on are the same lending company. In theory, that lender that has the 3% loan with you now on STR #1 would know the current value of your home and your payment history and would know how much equity you have. They may allow you to pledge that asset's equity instead of a cash downpayment and pick up a new loan on STR #2 at the prevailing interest rate. The only caution I would have is that you need to make sure the combined net cashflow from both properties covers each note.  Because terms of the loan will most likely contain a cross default clause.  Which will allow the bank to foreclose on both properties if you default on one of them. I would also see what your sensitivity to vacancy is.  You cannot afford any major long term vacancy. You should also make sure that your jurisdiction has no plans to change rules on STR rules especially during the early years of your acquisition.

    1Reply
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