Should you fund a hard money deal with heloc?

Question

my wife and I just bought a house and it appraised for 43k over what we're buying it for at closing.

we are in the process of renovating that house so hopefully we can increase that value even further.

I've been looking at some distressed properties in the same area and trying to figure out how to fund them. The lender on my current house doesn't do anything requiring a remodel I get the impression that's most lenders aditudes.

would I be able to fund a hard money deal on a distressed property with a heloc or home equity loan? Is there a better way to fund a deal that would involve a large remodel?

Andrew Postell · Answer

@John Currey thanks for the post.  I'll answer your questions directly and then expound on it some if you don't mind.

would I be able to fund a hard money deal on a distressed property with a heloc or home equity loan? - Yes, this can absolutely be done.

Is there a better way to fund a deal that would involve a large remodel? - Yes, usually there is a better method for someone in your scenario based on how you described.So, most HELOC lenders will need a certain % of money in your property to lend to you.  Meaning, if a HELOC lender required you to leave 20% equity in your property and your current loan was at 85% LTV...then you would not be able to get a HELOC at all.  While receiving $43k in instant equity is AWESOME (congratulations on getting such a good deal) we would need to know what % of equity you have it in to determine if it's even possible.

Now, let's assume that it's NOT possible at all to get a HELOC on your home - then it's no big deal because there are lots of other ways to fund a remodel of a home.  Things like Hard Money or Bridge Loans or Renovation loans all provide us monies to rehab properties.  You just need to work with the "right" lenders (more on that in a minute) and make sure you "buy right" also.  When we speak about buying investment properties that are in need of rehab we usually have to buy them "off market" and buy AND rehab them at 75% of the ARV (or pretty close to it).  The reason for those rules is because most lenders will provide a loan of 75% of the ARV in that scenario.  Now, your question was more about lending and what's possible so to really explore that technique of purchasing will require more than just a simple answer like this but for the sake of time I'll leave it at that for now.

I am a firm advocate of getting plugged in to some local real estate groups.  Meetup.com is a good resource for those but some of the groups will also post here on Bigger Pockets Marketplace too.  Even facebook might have some good local groups for you.  This is where we get find all sorts of resources like "off market" properties, lenders, plumbers, and even other real estate investors as well.  If you want to get good at real estate, get plugged in locally.

Hope all of that makes sense.

Account Closed · Answer

@D Jones, I'll break it down.  I got $108k out of the equity from our primary residence.  That is 5.39% for 30 years.  This cost $90 for an appraisal.

I got $92k from our rental as a line of credit.  This is good for ten years.  This cost $485.  It just closed this last Friday so I was not sure on the closing amount when I posted earlier.  Another awesome feature is that I only have to start paying on this loan when I actually pull the money out.  Unlike the loan on our primary above, which I had to start paying on right away, whether I used it or not.

Right now we have a $100k loan on the rental.  So after I finish the rental we will have a total of $300k in loans on the rental.  That is the $108k equity pull out + the $92k line of credit + the $100k mortgage.

The rental hopefully at the time of completion will be worth between $500-600k.  The last five houses on the same street have sold in that range, and this house will have the same number of bedrooms and bathrooms.  It has a better view and will have nicer decks.  The only thing it will not have is off street parking.

Even if I pulled $320k out to cover all the loans and the cost of the monthly payments on all of them during this year that I get it rehabbed, I will still be only pulling out 64% of the value at the new rehabbed value of $500k.  320/500=64%. I'd still have 34% equity at the low end of the valuation range, $500k.  At the high end, $600k I'll have 47% equity left by taking out the $320k, 53%. $20k will go back into our account to pay us back for the monthly payments we made during this rehab time.  I don't think it will actually be that much, but I don't know yet because the line of credit will vary as the months go by.  As the balance I've taken out increases, the monthly payment will increase.

The pay offs for the line of credit, the equity loan, as well as the current mortgage will come from the new $300k loan. Then I will be left with one loan on the rental as well as an equity line of credit, and one loan on my primary residence.

Since my loan to value ratio will be on the low side, I'm thinking my interest rate will be better so that I can get a thirty year fixed rate and be done with this project entirely.  It is hard to say what the interest rates will be in a year, but I'm hopeful it will be better than they are right now.

In addition, since neither of these loans have term limits that are six or twelve months long, I could continue to pay on all three loans and wait until the interest rates get better.  This feature made this project doable since getting work done in this city is time consuming.  I would have been a wreck trying to make sure the work got done in a short six months or even a year.  I plan on getting it done in a year, but much of the work I am not going to do.  I have to hire it out.  Time frames are not mine to manage to a huge degree.

Taking the $320k out will allow me to pay off the $102K equity loan on my primary residence, and the current $100k mortgage on the rental, and the $92k line of credit on the rental.

An added benefit is that I will still have the $92K line of credit on the rental to use for another nine years as needed since I will have just paid it off.  It is like a credit card, you use the balance and then pay off the balance and then you have the balance to use again!  Genius!

This will give me the money for my next project, which I think will be our primary residence.

I am thinking of moving all our bank accounts to these two small banks since they really did take care of us.  I've got both loans done and I'm still blown away that it worked out this way.  I find myself logging on to make sure we really do have access to the money we need to finish this project.  I'm forever grateful that I called and called and called all the small banks I could find in my area.

Please let me know if I have missed something.

Erik Estrada · Answer

Hey John,

You can use a combo of both the HELOC and the hard money loan. Just make sure the ARV is there so you don't over leverage yourself come time to refinance.

Also if the goal is to refinance as soon as possible, you might want to consider looking at DSCR loans. Many lenders will allow up to 90 days title seasoning to cash out on the ARV as long as you can show you put a significant amount of rehab.

Devin Peterson · Answer

You can use the HELOC for sure, most Hard Money reno lenders will not ask for more than a personal financial statement of assets. Once you bring this distressed asset up to snuff and are ready to stabilize you can use a DSCR refinance for the exit strategy from HML.

Account Closed · Answer

@John Currey, I’m doing it.

I’ve got a home equity loan on my primary residence and a line of credit on my rental. Together they give me the funding i need to finish my rental rehab.

I looked into hard money. It was expensive. $37k, $26k, $10k are the three offers I got to finance the same about of money, $200k.

My two loans cost me $90 in all, and I got the $200k at 5.39% interest, 30 year term.

In a year when I finish my rehab, I’ll get a new loan and consolidate so the debt sits just on the rental. There is no pre-payment penalty on either loan.

Go to small local banks. The ones that are easily overlooked. They are golden.

Eric Mcginn · Answer

You’re gonna refinance a 5.39% with a 30 year lock?!

Nicholas L. · Answer

Yes, but don't get leveraged 100%

Too risky

Chris Seveney · Answer

@John Currey

Getting a HELOC is getting tougher by the day. Would it be take money from a HELOC to fund another acquisition with hard money.

Most likely no. Why? Because a hard money lender will want a personal guarantee and you are most likely 100% leveraged between both loans and with values moving I the wrong direction this is a very risky deal

Account Closed · Answer

@Eric Mcginn, yes, I've got that on my primary.

The rental line of equity is good for ten years.

John Currey · Answer

refinance would be the exit strategy.

Should you fund a hard money deal with heloc?

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