Using the HELOC strategy to buy rentals

[Alex Corral]

I am in the process of obtaining a HELOC on my primary, with plans to buy some rentals. I've been doing a lot of research on how to pay down the HELOC faster using it as a checking, and have some questions as things are getting a bit muddied.

I'm debating on buying 2-3 properties cash (HELOC money). I think this would allow me to make a more aggressive offer, and saves me about 3% in closing costs per property. I was planning on using all the cash flow from the rentals to pay down the HELOC faster. In addition, I plan to deposit extra income left over from my paycheck. At this rate, my plan is they should be paid in 6 years. At that point, I would start over. With 6 properties, the cash flow shouldbe more and those 3 properties paid in 3 years or so.

Pros: More aggressive cash offers, save on closing costs, pay down HELOC faster.

Cons: HELOC interest is no longer tax deductible, while a typical mortgage on the rentals would be. Will take me 3 years to buy more rentals paying cash.

My other dilemma is if I buy the rentals in an LLC, and use the cash flow to pay off the personal HELOC, what issues am I getting into? Should I even put them in an LLC?

I also wanted to invest in some private notes and use those profits to pay down the HELOC faster.

What all do I need to do?

TIA

[Arlen Chou]

@Alex Corral as some have pointed out, there are still tax advantages to a HELOC, you just need to document things more clearly so that the trail of money is more obvious. The key to this strategy is to find a competitive HELOC. My current HELOC is for over $1M on a 10 year draw at prime MINUS 1%.  I pay down my loan at an accelerated pace by calculating what my monthly nut would be if I had a higher fixed rate mortgage and paying that amount vs what is actually due. The delta is applied to principle.  If I need money in a pinch I can access it easily with the HELOC.  With a traditional loan I would be behind the eight ball and potentially need to do a "cash out refi".  

But rates are creeping up very quickly, so I am currently refinancing my HELOC into a 5 year fixed rate HELOC at 3.5%. Using the HELOC strategy makes you look so much stronger in a tough market. Once the property was seasoned, I pulled a stand alone commercial loan and recharged the HELOC. Once my refi is in place I will be ready to go shopping again.

The HELOC strategy is really like a "self funded" short term bridge loan, that allows you to get into the property.