Using HELOC to finance investments with no money down

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

You'll be able to use that approach for about 4 properties and then conventional lenders will stop lending. I'd suggest seeking seller financing with a high cash on cash return so that your future options aren't limited.

OP

Lexington, KY · Member since 2010 · 315 posts · 133 votes

16y

I would appreciate it if you would further detail your reasons not to use a HELOC. As I mentioned in my original post I currently have a home with no mortgage, no HELOC, nothing, just free and clear that should appraise for at least $300,000. My thought is to get a line of credit and use it only for acquisitions, and then immediately refinance the investment properties I purchase with their own mortgage.

My thought is that if I use cash as a bragaining tool (the offers I make will llok jus tlike cash offers to the seller) and buy at a discount (foreclosures, pre-foreclosure, master commissioner, short sales, etc.), then when I refinance I can get most of my money or all of my money back out, effectively buying with $0 down. I would then pay off the HELOC and only make draws on it for acquisitoin. So there is no real concern about them calling it, because there would only be a balance on the HELOC for a period of time long enough for me to refinance the investment property itself. I cannot find too many pitfalls with this strategy please ellaborate further about your concerns.

OP

Lexington, KY · Member since 2010 · 315 posts · 133 votes

16y

GGless,

Why would conventional lenders stop refinancing the investment properties after a few of them? If i kept them in different LLC's and the properties were effectively free and clear (purchased with cash) and the LTV is acceptable, why would they stop, what would change after 4 or so?

I like the idea of owner financing and have been actively looking for such deals, but that strategy aside, I don't understand why my HELOC acquisition idea wouldn't work for long. I feel even if it would only work for a short period of time it still seems like a good idea to do for 4 or 5 properties to own with no money down. And continue to pursue other strategies, be it owner financing etc., as well.

Alex CraigBusiness Member

Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes

16y

Jimmy, it has worked for me. However, when I use my HELOC, I make sure it is for short term use only and that I am very confident that I am either getting my money back within a short period of time (3 months) or that I am going to be refinancing. I agree with Curt, you do not want to be into a investment property long term with your HELOC, simply b/c I would not want my personal home tied to a investment property. Counting on a investment to pay back a debt is probably not wise; there is no such thing as a sure deal. HELOC are great cheap money--but one day that note is going to be due, investment properties are not liquid and you would not be able to get immediately get your money back to repay the debt. That being said, if you are financially stable and are confident that you can repay the HELOC without the income from a investment property, then go for it.

901-848-9028

3 Reply

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

Jimmy,

I think the reasoning behind your acquisition strategy has legs. Cash is certainly king.

It's been my experience with 1-4 unit properties, that financing in the name of an LLC is next to impossible, if not impossible. The FNMA guidelines limit a borrower to 4 non-owner occupied properties. Investing in Multi-Family is a different story.

2 Reply

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

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.

5 Reply

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

16y

The best way to use a HELOC is to have the cash to pay it off!

Not metioned yet, you will have to own the property for more than one year for the appraised value to be used in your refinance. Again, the rule is: Within one year, the appraised value or cost of acquisition (plus costs of improvement), WHICH EVER IS LESS.

Refinancing an investment property is alot harder than an owner occupied, getting cash out will be like pulling hens' teeth, IMO.

OP

Lexington, KY · Member since 2010 · 315 posts · 133 votes

16y

Great feedback, I appreciate all of the responses.

This Freddie/Fannie limit seems like it will pose problems regardless of your strategy on the financing side of things. If I want to acquire a large portfolio of 1-4 family - regardless of my thought on $0 down HELOC strategy - it seems that would make it quite difficult.

In that regard I like the idea of acquiring 5+ multi-family instead of 1-4, that way the 4 properties i can purchase without such hassle will be larger investments. (If i can only have four - I want four big ones, not four $50,000 duplexes).

Also, it seems that in these financial times even the word HELOC scares people.
Would my strategy work better if I revised it as such:

Take out a 1st mortgage on my current residence for a long term fixed rate and then used those funds to make acquisitions of 5+ multi-fmaily or apartments, refinance the invesmtent properties I acquire and keep the 1st mortgage funds as an acquisition pool. (Assuming of course that I have the current income from my job to carry a 1st mortgage.) If the investment properties cash flow positive it seems like a good idea.

I have even thought about using a $200k-$250k 1st mortgage as a down payment towards purchasing a 75 unit apartment complex in Lexington, currently listed right at about $1,000,000. This property over about 1-2 years could be refinanced after I get the cash flow up and expenses down, and maybe cash-out refi that way.

By the way the cash out is not a nessecity just a thought that if you purchase at enough of a discount, then the refi of the investment property - even at 70% LTV - it is feasible that you could cash-out or at least have $0 down.

It seems that with the one year rule and secondary market restrictions it would be best to go for a larger apartment complex and try to cash out refi a year or two down the road after I execute some sort of value-added play, or just running the property more efficiently.

Eric M.

Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes

16y

I agree with the Examiner. The flaw in the strategy to me is not using the HELOC for purchases. I think that is mostly fine.
The problem is the plan to refi at 80% on a NOO property. I don't see that happening. I think it will be closer to 60%.
But either way, 300K in equity is a good starting point (I am assuming you have set aside any money to pay taxes on the inheritance).
If you can pick investment properties well you'll be fine.

2 Reply

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

Jimmy,

Don't you love BP! The knowledge/info gained in two hours on this forum equates to countless hours talking with loan officers, RE guys, etc...

Back to topic, I think a point the guys are trying to drive home is that your money is at risk whether you finance via equity line or term loan.

Thinking out loud here, If you were to place the free & clear property into a corporate structure and then borrow funds for the purchase of investment property from that entity, that entity can record the mortgage/lien on the house. Then you'd be able to do a rate/term refi to take out the interim financing instead of cash out financing. BP nation, what are the potential issues here? The refi lender won't like the way the pay-off looks because of arms length transaction requirements?

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

Once you go to 5+ unit buildings you're outside "conventional loan" territory. You have to get commercial loans. That's what I'm talking about when I mention portfolio lenders. With that type of lender, you won't have those limits. You will still have strict qualifications. You will still have to wait a year (at least) to do a cash out refi.

A refi is a "cash out" refi if any of the proceeds from the refi do anything other than pay off an existing loan. If you pay cash, then refinance, its a cash our refi even if the amount you get is less than the amount you put in. If you don't do the refi, your cash is tied up in the property. Nice and safe (no payments to make up out of pocket if you don't have tenants), but usually not as profitable as having some leverage.

Do some reading in the Rental Property forum about the reality of expenses. Specifically, the "50% rule". Many new investors pooh-pooh that rule, saying expenses can't possibly be that high and maybe its worst case. You can pretty much be assured that with a 75 unit complex, though, that's not worst case but best case. That 50% does not include debt service.

When you get into big buildings like that you're in a different world. Building codes are very strict and building departments totally unforgiving. Screw up and they will put your tenants on the street in a heartbeat.

Financing big properties is expensive. The appraisals and environmental studies are expensive and time consuming. I don't think you'll get 80% financing on a building like that, especially with zero experience. Speak with some brokers, though, I could be wrong. You're going to spend some big bucks, potentially $30-40K just to do the deal. And they will want to see signficant reserves. Even $250K may be tough to get into that property.

Without knowing some details, rents, claimed expense numbers from the seller (rest assured those are understated), etc, its impossible to evaluate that deal. That's $13.3K a unit, which sounds somewhat promising. OTOH, if its a complete dump and filled with drug dealers, it will be a huge turn around challenge.

I'd strongly recommend you start with a few SFRs. Those are easy to acquire, and easy to dump if you change your mind. Learn the business where the mistakes (inevitable) are fairly cheap. Then move up.

5 Reply

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

Originally posted by GGless:

Thinking out loud here, If you were to place the free & clear property into a corporate structure and then borrow funds for the purchase of investment property from that entity, that entity can record the mortgage/lien on the house. Then you'd be able to do a rate/term refi to take out the interim financing instead of cash out financing. BP nation, what are the potential issues here? The refi lender won't like the way the pay-off looks because of arms length transaction requirements?

I've wondered about this, too. On one of my refi's, the lender was an individual (hard money). The potential refi lender didn't like that and said the could have done the loan if it had been an entity. OTOH, if they figure out the entity is yours, I suspect they will balk at the loan.

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

16y

Cashing out at 75% at a fixed rate right now is a much better plan. You have money in the walls that is sitting idle at a very low return, if any. Turning you equity into a performing asset (cash) is a wise move from the "use of funds" standpoint. Having the liability and being in a position to pay it off will not change your net worth with this conversion of assets. Having the cash to work with will allow you to increase income and net worth, if you invest it wisely. Consider your long term plan to match the mortgage, your age and ultimate goals. You may need a reserve to make the payments as well until you investments can pay the cost of your money. Much better plan, IMO.

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

What's the wait time on a rate/term refi based on appraised value?

Mitch Kronowit

SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes

16y

Originally posted by GGless:

You'll be able to use that approach for about 4 properties and then conventional lenders will stop lending.

I thought FNMA lifted that limit last year back to 10. Did they reinstate it?

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

Jon corrected me, it's 10 with FNMA.

A lender that sells to FNMA will underwrite a max of 4.

Your mortgage broker can send the 1st 4 files to Wells Fargo, next 4 to Suntrust and the last 2 to Flagstar, for a total of 10, for example.

OP

Lexington, KY · Member since 2010 · 315 posts · 133 votes

16y

Thanks again for all the feed back - you are right greg I've learned alot already!

I respect the 50% rule. I like to be VERY conservative in my estimates. I like to take the gross rents minus a good 10-20% vacancy and collection loss, then I discount to 55% of that number. I take that net revenues before debt service number as a percentage of the purchase price and compare it to the loan constant as a percentage of the purchase price. (loan constant being the sum of the 12 monthly payments). If there is a healthy margin between the two I assume the property should have positive cash flow.

As far as the apartment i mentioned, it is not in a war zone by any means but obviously not in the most pristine part of town. It is a working class hispanic neighborhood of individuals who are primarily employed by the horse industry here in Lexington. Maybe not a neighborhood i woud live in, but it's working class.

I like the idea of bigger commerical multi-family properties as you can diversify your risk of vacancy and the effect on your bottom line as compared to a duplex.

FinExaminer- Your train of thought is right in line with mine. I feel that with a good bit of equity as a head start I should be able to grow my net worth substantially with the right strategy.

Jon Holdman - I appreciate the detailed reponses. It seems that rolling my SFR into an LLC and borrowing against it that way may be my best option, do you feel that this is the case, why or why not?

I have received great feedback about my equity acquisition strategy. Perhaps there are other strtegies that may be better such as using cheap <5% fixed rate and "arbitrage" the spread between that and the 12% interest on tax liens that is mandated here in Kentucky. (I know this strategy would not be that simple but could be a very feasible strategy if I hammered out the complexities)

I would like to pose an open ended question of sorts:

With $300,000 in equity and really just getting started, what real estate investment strategy would you pursue? I have a healthy appetite for risk as I am young and would prefer to take more risk now than in retirement, but I also am dilgent and conservative in my investment analysis.

Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes

16y

Originally posted by GGless:

Jon corrected me, it's 10 with FNMA.

A lender that sells to FNMA will underwrite a max of 4.

Your mortgage broker can send the 1st 4 files to Wells Fargo, next 4 to Suntrust and the last 2 to Flagstar, for a total of 10, for example.

I'm not sure. The last official thing I saw was from Freddie Mac, and I can't even track that down right at the moment. It listed the guidelines, which had one set if the new mortgages was your first to fourth and a stricter set for the fifth to ninth.

Sending 1-4 to one lender then the fifth to a different lender won't necessarily help. That fifth loan is still subject to the big guy's (FM & FM) guidelines. That said, individual lenders do have their own guidelines that may be more strict, and Wells (for example) might say only four investment loans to one person.

The last one I did (rate & term, cash in, not cash out) took six months seasoning to be able to do a rate and term. The loan was done by a local company (Cherry Creek Mortage) who immediately sold it to Chase. I do some of my banking with Chase, but the won't directly make a investor loan. They will buy it after the fact. Makes no sense to me.

Jimmy, As soon as you start talking about LLCs you're into commercial loan territory. You're going to have to give a personal guarantee to get a loan in an LLC. I don't think sticking the house into an LLC is going to help, if you're living in it. But, again, best to start talking directly to lenders. Get a list of every bank in the area, and pick up the phone and start calling. The FDIC bank directory can be useful.

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

Jimmy,

Personally, I'd find someone that's succesfully investing in the arena I want to invest in, find a smoking deal and offer to partner up with them. They'll talk you out of a bad deal, show you what things you should do if it's a good deal and you'll have that experience for the rest of your life to draw from. They'll take you seriously because you have skin in the game.

Jon,

Most mortgage companies sell the loans to FNMA/FLMC. That's why they underwrite to their guidelines. Ever make a mortgage payment to Fannie Mae? No one does. Reason is, they don't service any of the loans. They pay another company, like Chase, to service the loan. They pay them very handsomely actually.

Rental Property Investor · Southwest Michigan · Member since 2010 · 48 posts · 43 votes

16y

"Jimmy, As soon as you start talking about LLCs you're into commercial loan territory. You're going to have to give a personal guarantee to get a loan in an LLC. I don't think sticking the house into an LLC is going to help, if you're living in it. But, again, best to start talking directly to lenders. Get a list of every bank in the area, and pick up the phone and start calling. The FDIC bank directory can be useful." - quote from Jon

Jimmy, were you asking about placing the property into an LLC and borrowing against it, or putting the cash you pulled out of the home into an LLC and lending to you?

Steve Babiak

Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes

16y

Originally posted by GGless:

Jimmy,

...

Thinking out loud here, If you were to place the free & clear property into a corporate structure and then borrow funds for the purchase of investment property from that entity, that entity can record the mortgage/lien on the house. Then you'd be able to do a rate/term refi to take out the interim financing instead of cash out financing. BP nation, what are the potential issues here? The refi lender won't like the way the pay-off looks because of arms length transaction requirements?

The main problem I see with this is INCOME - actually the lack thereof in this entity that you propose to hold title! If you can't show any income, then the lenders will be very skeptical about lending. At least if the property is in your name, you can show pay stubs as income to get the HELOC. Then, you can use a bank letterhead showing that you have funding up to $$$$ for proof of funds; that would allow you to place bids on REO properties if you chose, or any other ALL CASH transactions you wish to pursue.

OP

Lexington, KY · Member since 2010 · 315 posts · 133 votes

16y

I was talking about putting the property into an LLC and then financing against it because i thought that was what was implied by a previous post, I must have misunderstood.

It's probably better to just take out a personal term loan or HELOC on the house and put the proceeds into an LLC and invest from there. Once I have established income to that LLC for a period of a year or so I should be able to get financing through the LLC itself. That was my initial thought.

As far as LLC's being commercial, is it the case that even if you purchase SFR or 1-4 fam in an LLC that you'll still have to pursue commercial financing because it is a business entity that they are loaning to? If that the case then once again I might as well be dealing with 5+ multi family if i will have to get commercial financing anyways.

Also, if have your assets incorporated into an LLC, or the like, which requires commercial financing which inevitably means higher rates, costs, etc. What kind of strategy do people pursue who want to invest in SFR and 1-4 family with conventional financing but also want the protection of an LLC?
Just starting out, I could hold one or two properties in my name, but I still wouldn't be that comfortable with it.

Is it common practice to acquire conventional secondary financing for investment property in your personal name and then put the property into the LLC after the fact, is HUD/FNMA/FHA kosher with that?

Bryan Coomer

Residential Real Estate Broker · Indianapolis, IN · Member since 2010 · 28 posts · 1 vote

16y

It's what I've done and imo it's ideal. Especially for homes you'll resale after rehabbing. With rentals it's a different story. Just make damn sure you can get a loan after buying the property! Lenders aren't giving too many loans out, especially on investment homes. It saves the hassle and expense of getting new loans and cuts that by just paying refi fees. It also gives you the option of interest only payments and very low interest rates.

Justin Paul

Investor · Poway, CA · Member since 2011 · 22 posts · 1 vote

15y

What an amazing amount of brain storming and info. You gotta love BP!