Confused about using HELOC to buy rental properties...

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Confused about using HELOC to buy rental properties...

Mike T.
Member since 2023 · 1 post · 1 vote

I'm just starting out and would be incredibly appreciative of feedback on something I am a tad confused about. I have a primary residence with a fully paid off mortgage (I am very grateful for this but at the same time I have all this equity TIED DOWN in a liability).... so I have about 440k equity that is tied down as that is about 80% of the tappable equity. 

What I am confused about is, if I get a HELOC for 300K and this HELOC has a fixed 8% APR (I would try my best to get a fixed rate HELOC vs variable), and I (for example) then buy a 150K house and put down 20% (equals 30k). Then my HELOC is going to charge me 8% interest on the 30K and then the mortgage lender is going to charge me 7% on top of that for the remaining.

I am having trouble seeing how I could even cash flow from such a rental when I have 2 dfiferent entities (HELOC and also a mortgage lender) charging me interest? Am I missing something in regards to how this works? It would make sense if I was using my own cash... but it's not making sense in how this works when involving a HELOC at 8% APR because HELOC is charging me massive interest... unlike if I was using spare cash.

Thanks in advance!

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y

@Mike T.

You cannot cash flow with 100% leverage the majority of the time. A line of credit is good if you bought an asset and were rehabbing it to sell but for keeping it as a buy and hold it does nothing for you - again unless you were trying to do a major renovation to enhance value and refinance

Otherwise you are just overleveraged

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  • Jason WrayPro Member
    Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
    3y

    Mike,

    You have (2) options Heloc or Cash-out refinance but it’s can get tricky if you do not know how banks and underwriting works. Years ago it was smart to pull out a Heloc and use it when- ever you needed to draw from the CL. Fast forward to today now it’s not that great because you can actually take cash out through a refinance at a lower rate than a Heloc. Cash in hand is also an asset and you can purchase the home all cash.

    A Heloc is nothing more than a credit card and considered a liability and "Cannot" be used as an asset or PITI/liquid reserves. Knowing this up front can make or break a new purchase during the approval process. The reason why cash out refinance may be the better choice is when you pay "All Cash" you can immediately pull 80% of the cash back out without having to wait (6) months to establish title seasoning.

    I understand you may not want to have the mortgage payment but if you buy "all cash" you can put the cash back into the mortgage or into a interest bearing account to counter the rate. The whole point is to keep the cash moving and buying more properties BRRR. The whole time you are doing this you can set aside some of the cash in savings to make the payment until you need to make the next purchase.

    You pull out the money, set some aside to pay the mortgage for 6 months and use the remainder to buy the house all cash for best price. Again No 6 month wait to get your cash out you pull out 80% same month and go right into another purchase to build your portfolio.

    Biggest thing to remember is as you start to buy more homes the banks/lender require you to show 3-6 Months PITI in cash reserves and a HELOC will not suffice, it will hurt you since it's a DTI burden.

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  • Chris Kendrick
    Member since 2023 · 191 posts · 21 votes
    3y
    Quote from @Jason Wray:

    Mike,

    You have (2) options Heloc or Cash-out refinance but it’s can get tricky if you do not know how banks and underwriting works. Years ago it was smart to pull out a Heloc and use it when- ever you needed to draw from the CL. Fast forward to today now it’s not that great because you can actually take cash out through a refinance at a lower rate than a Heloc. Cash in hand is also an asset and you can purchase the home all cash.

    A Heloc is nothing more than a credit card and considered a liability and "Cannot" be used as an asset or PITI/liquid reserves. Knowing this up front can make or break a new purchase during the approval process. The reason why cash out refinance may be the better choice is when you pay "All Cash" you can immediately pull 80% of the cash back out without having to wait (6) months to establish title seasoning.

    I understand you may not want to have the mortgage payment but if you buy "all cash" you can put the cash back into the mortgage or into a interest bearing account to counter the rate. The whole point is to keep the cash moving and buying more properties BRRR. The whole time you are doing this you can set aside some of the cash in savings to make the payment until you need to make the next purchase.

    You pull out the money, set some aside to pay the mortgage for 6 months and use the remainder to buy the house all cash for best price. Again No 6 month wait to get your cash out you pull out 80% same month and go right into another purchase to build your portfolio.

    Biggest thing to remember is as you start to buy more homes the banks/lender require you to show 3-6 Months PITI in cash reserves and a HELOC will not suffice, it will hurt you since it's a DTI burden.

    You have to wait 12 month seasoning period and if you pay cash for a property you can only cashout refi on the purchase price not the arv, have to wait 12 months
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  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    3y

    @Mike T., forget where the HELOC interest. Pretend instead of paying off your primary residence you saved the money and just have a typical mortgage to pay for the house you live in.

    That is your seed money, I would not count the interest you're paying on it.

    If you want to think of it the way you are and count it, realize that even if you are cash-flow neutral to start, as rents rise and interest rates fall allowing you to refinance you will cash-flow better, PLUS you are paying down those loans building equity PLUS you are getting market appreciation over time. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Mike T.

    You cannot cash flow with 100% leverage the majority of the time. A line of credit is good if you bought an asset and were rehabbing it to sell but for keeping it as a buy and hold it does nothing for you - again unless you were trying to do a major renovation to enhance value and refinance

    Otherwise you are just overleveraged

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  • Christopher Harris
    Lender · Member since 2023 · 16 posts · 5 votes
    3y

    Hi Mike, did you obtain a HELOC yet?

    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    0Reply
  • Chris Kendrick
    Member since 2023 · 191 posts · 21 votes
    3y
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    No, it does matter cause you're still leveraging against leverage. The risk is still all intact.
    0Reply
  • Chris Kendrick
    Member since 2023 · 191 posts · 21 votes
    3y
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    No, it does matter cause you're still leveraging against leverage. The risk is still all intact.
    Risk is involved with anything you do, driving your car to work , there is risk, i guess your saying that your risking your house if something goes bad
    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    No, it does matter cause you're still leveraging against leverage. The risk is still all intact.
    Risk is involved with anything you do, driving your car to work , there is risk, i guess your saying that your risking your house if something goes bad
    That's taking things out of context. But there is calculated risk, leveraging against leverage is stupid risk. The way you played from 2008-2022 isn't the same 23 forward, you'll likely get burned. Read and react, don't be foolish.
    0Reply
  • Chris Kendrick
    Member since 2023 · 191 posts · 21 votes
    3y
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    No, it does matter cause you're still leveraging against leverage. The risk is still all intact.
    Risk is involved with anything you do, driving your car to work , there is risk, i guess your saying that your risking your house if something goes bad
    That's taking things out of context. But there is calculated risk, leveraging against leverage is stupid risk. The way you played from 2008-2022 isn't the same 23 forward, you'll likely get burned. Read and react, don't be foolish.

     Well explain, if you can

    0Reply
  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:
    Quote from @Chris Kendrick:
    Quote from @V.G Jason:

    Don't buy a property with a HELOC. You're basically using leverage against leverage. Move more carefully.

    Well if your doing BRRR method, your going to get back that money anyway so don't matter, i used heloc to buy rental property but it was only a down payment for it , 
    No, it does matter cause you're still leveraging against leverage. The risk is still all intact.
    Risk is involved with anything you do, driving your car to work , there is risk, i guess your saying that your risking your house if something goes bad
    That's taking things out of context. But there is calculated risk, leveraging against leverage is stupid risk. The way you played from 2008-2022 isn't the same 23 forward, you'll likely get burned. Read and react, don't be foolish.

     Well explain, if you can

    Explain what? Leveraging against leverage? Or investing differently?
    0Reply
  • Timothy Howdeshell
    Investor · Fresno, CA · Member since 2016 · 222 posts · 237 votes
    3y

    @Mike T.

    You probably won't cash flow in this scenario. The idea is that the would be cash flow will now be used to pay off the HELOC. Once that loan is repeated your cash flow will "appear".

    HELOCs are great for short term use. You buy the property and then force appreciation, or simply wait for the market to go up (speculation).

    It may be better to not get a mortgage and put 100% down on the rentals using the heloc. Should be able to beat an 8% return (unless you get hit with early CAPEX). Then when/if rates go down you can put long term debt on it.

    First option is much better. Use HELOC to BRRRR.

    0Reply
  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    3y

    @Mike T. You are correct, it would be tough to cash flow in that scenario with interest rates where they are. HELOCS are great for short term investments such as flips and BRRRRs. You could cash out refi your house - at 6% on a 30 year mortgage you’d be paying $200 less than 8% interest only per month.

    One option for you could be to flip a couple houses with that cash out refi or HELOC to build up more cash and then use that for a 25-40% down payment on an investment property.

    Final thought, which I think you have realized, is that cash flow is not the only metric you should be considering. Return on Equity is also important and right now you are at zero in that department. Even if an investment property only kicks off a very little cash flow early on, you are still getting a return as the rent is paying down the mortgage building equity. Only be willing to accept a low cash flow if you have carefully planned for major expenses and have the funds to cover these.

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    3y

    You will be 100% leveraged. You will not cash flow.

    Additionally your heloc is going to likely have a rate a lot higher than 8% right now.

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