HELOC for funds to purchase investment property?

[David Sisson]

I'm trying to figure out if this is a good idea, or pitfalls to avoid.

I'm interested in purchasing a local multifamily (3 family) in my area - buy and hold - with the goal being cash flow to help fund my daughter's college education. I think this may take 2 or 3 homes total, but I'm starting with one. I prefer to purchase properties that are ready to go, but willing to do some renovation. Not interested in a gut renovation (for example). 

I don't have the $ for a 20-25% down payment, but have plenty of home equity I could tap. I could do a cash out refi, a home equity loan or a home equity line of credit. 

I've heard that a HELOC might be a good option - essentially get the HELOC, use it to fund the investment property, wait for seasoning and refi the home, repaying the HELOC in the process. Repeat with the next home.

I'm confused about the refinancing of the home - doesn't this imply that the investment property has to rise at least 20-25% in order to cash out and refi? If I'm buying a 'ready to go' property, isn't it harder to get it's value up this much in a year or two? Wouldn't this work better with distressed properties? 

I can run the numbers the various scenarios, I just don't understand the refi portion of the deal. 

[JD Martin]

OK, thoughts in no particular order:

1. Yes, HELOC for investment is a great idea so long as the investment is a great idea. It lets you offer all cash (hopefully) which should get you better deals. I used HELOC on my first few deals along with my own cash saved up.

2. If you are buying a property at market, then one of the "R" in "BRRRR" is missing. That means you are going to buy, rent, refinance, repeat. You will end up leaving some of your own cash behind. If the property cash flows at a very healthy level, this may not/should not matter. I have refinanced some of my properties and left a little cash behind. No big deal. You either reaccess it later by refinancing the property, selling it, or leaving it there as a hedge against economic disaster.

3. Yes, BRRRR works better with distressed properties (the missing "R" is "Rehab"). You add value by remodeling/repairing the property.

4. If you don't have enough money to do another one immediately, you just have to wait a little longer.