HELOC for Primary?

[Tim S]

We bought an REO townhouse in Nov 2011 for $91k (bank was only accepting cash deals), rehab costs $25k. The property is now conservatively worth $170k. Our original intent of this purchase was to live in the townhouse for 2-3 years and then buy a SFH and rent out the townhouse.

I have been approved for $120K HELOC for the townhouse. Closing costs only ~$200 since no appraisal will be done. I am considering using the HELOC plus additional cash to buy our SFH. I would like to pay cash to negotiate a better deal, lower closing costs, etc and we are looking in the $200k range.

After the SFH is purchased, I would either sell the townhouse and pay off the HELOC or rent the townhouse (estimated rent $1600 minus $230 HOA fees). I would like to keep my options open since I am still a bit nervous about being a landlord. If we rent the townhouse, after 6 months, I would plan on taking a mortgage out on my primary SFH and pay off the HELOC.

I'm interested in hearing from the Bigger Pockets community to see if you all think this is a sound plan. Thanks!

- Tim