Is it foolish to use a HELOC for a down payment on a rental property?

Question

Hello, I'm looking for some advice. I found a property in my area that would produce decent cash flow and appreciation; however, I would have to use funds from a HELOC on a different rental property for the down payment. This would obviously reduce my cash flow on both properties, as I would be paying the minimum HELOC payment plus extra towards the principal to pay it off quickly. This would also prevent me from using the HELOC for a different type of investment like BRRRR or fix and flip. It would take around 5 years to pay off the HELOC by using some of the monthly rental income from two investment properties. Is it foolish to consider using the HELOC for the down payment? Any advice or shared experience would be great. As a side note, my wife and I work full time and are looking at strategies that are less time intensive. Thank you!

Jacob Anderson · Answer

Hi Sofia, that's a great point. In this case I would not be able to pay the HELOC off within one year. I think we'll just be more patient and find a value add property. Thanks!

Dan Thomas · Answer

@Jacob Anderson

I've only used my HELOC for investing when I have a quick exit plan. For example funding rehab with the goal of a quick refi to pay off the heloc. There are alot of risks using your heloc and you need to understand how you will make the monthly payments for the heloc AND how you plan to pay off the principle of the heloc. Being 100% leveraged isn't a good thing. It may make sense to save a bit more and invest from a position of power.

Keep in mind most helocs are adjustable. I got bit a couple years ago and went from a 6% rate to almost 10% rate. The impact to a balance of 100 or 200k is substantial. Make sure you are prepared for that and have a contingency for that.

Michael Paling · Answer

While I don’t yet have personal experience with a HELOC, I’ve thought about this one for my self many times. I think in this scenario, I would advise against it. 5 years is a long time to pay off a HELOC, which doesn’t have a fixed interest rate. The advice I have received is that HELOC’s should be used for short term loans only with a definite plan to pay it off. Are you able to cash out refinance your property instead?

Chris Seveney · Answer

Surprising you can get a heloc on an investment property - those are tough. I would only do it if it was an absolute no brainer of a deal as if it goes south then you not only hurt yourself on that deal but also the property that you took the heloc out of.

This also depends as if your current LTV is 30% and want to go to 50% is different than going from 50% to 80%.

Warren Powers · Answer

As others have noted, this can be risky. Essentially 100% financing leaves no margin for error. I have done this and then we lost half of our W2 income, then a big HVAC repair, then the ELOC rate drifted up from 4% to 10%, then a storm forced a roof repair sooner than expected. A lot of other things could have gone wrong but luckily I have had great tenants and now a small cash flow. I learned my lesson and am keeping reserves  for emergencies and lower LTV on financing.

Dan Mcguire · Answer

The use of the line depends on the goal and exit plan. Purchased a property that needed some work and on the lower end of the market so homes were sitting. Got into the home with a low down payment , made repairs, rented and refinanced to pay off line and eliminate the PMI. Again, it depends on the plan and exit strategy.

Caleb Brown · Answer

Others have given good advice. It seems you would be using it as a 20% down payment on a turn key ish property. I would be leery of doing this. Ideally a HELOC is used for less then a  year project where you can refi or sell to pay back the HELOC. 5 years is a long time, things can happen and if you reduce the cashflow on both properties you'll be increasing the risk and having thinner margins. If you have strong income and savings then you can argue you'd be OK  but I would just use those savings as the down payment not the HELOC

Sofia Komrskova · Answer

I would only do it if you plan on paying the HELOC back within a year by either cashing out or selling. When used correctly a HELOC allows you to do multiple deals over and over again. By wasting it on the DP you tie that money up for years. So if the property is not a value-add or steeply discounted I would not do this.

Jacob Anderson · Answer

Hi Dan, that's great advice. It's probably smartest to just save up cash for a down payment. We recently bought a property using a HELOC and rehabed it's then refinanced and got most of our money back out. It's probably best to just be patient and find another BRRRR deal. Thanks for the advice!

Is it foolish to use a HELOC for a down payment on a rental property?

Most Popular Reply