Using HELOC to finance investments with no money down

[Jimmy H.]

I am a young guy with a bit of experience in real estate. I just inherited a home, free and clear, that is worth about $300,000. I have read many discussions of no money down transactions, I understand the pitfalls, the non sense the gurus try to sell, and I also understand that there are endless ways to try to go about achieving "$0 down" financing.

My question is about using a HELOC to finance acquisitions, particularaly acquisitions that I can acquire at a good discount to their appraisal value. My thought is that I could buy properties with cash (although I would be using a HELOC the seller would essentially be receiving a cash offer) at a discount and then refinance these properties up to about 80% LTV (whatever a bank will allow). But assuming that I buy at a good discount to fair market or appraisal values I would think I could get most of my money back out or possibly even a bit of cash back when i finance the investment property with its own mortgage. Then I could pay off the HELOC until I see another potential investment and then make another draw on my HELOC for future acquisition. This would cut down on my interest cost as opposed to intiating a first mortgage.

I have also considered just getting a first mortgage since I could get such a low fixed rate but this HELOC idea seems to me the better idea to acquire more property more quickly. I feel that I should pursue this strategy and then maybe get a fixed rate 1st mortgage sometime before rates go up just so I can lock in some cheap capital. My thought is to try to acquire multi-family assets that cash flow, finance the investment property and use the HELOC only for acquisition. I am thinking of investing primarily for cash flow not appreciation.

I would love to hear thoughts, opinions, suggestions, and have someone play a little devils advocate. I understand this strategy may not be as common because starting out with such a large amount of equity is not always common.

PS I am located in Lexington, KY and am looking at investment both in Lexington and surrounding cities of Georgetown, Nicholasville, Richmond, as well as the greater Cincinnati area.

[Jon Holdman]

Most lenders will stop lending to you once you have four mortgaged properties because that's the Fannie/Freddie limit. The limit actually goes to ten, but many stop at four.

When you are trying to get that fifth loan you will be limited to 70% LTV. You will have to shoe cash reserves of six months PITIA (A is anything else, like HOA dues) for all properties. You will have to have income to qualify for the loans. Rental income won't be counted until it's appeared on two tax returns. You will need to own the properties for a minimum of a year in order to do the cash out refi you want. You will have to own and finance the properties in your own name, not a llc.

If you search you can probably find a portfolio lender who will do more loans. The term will be shorter, like 15 years max, and the rate may be a little higher.

HELOCs can be locked down at any time by the lender. Just because you have a credit limit doesn't mean you can use it. The rate can also vary. But if you're willing to lose the house, it might be a source of capital.

Realize rental properties do not product much monthly income. Depending on your goals, it may take dozens of rentals to support you.