Should you fund a hard money deal with heloc?
Handyman · Hollister, MO · Member since 2023 · 15 posts · 8 votes
Should you fund a hard money deal with heloc?
Most Popular Reply
Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@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.
15 Replies
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
Yes, but don't get leveraged 100%
Too risky
- 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@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.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@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
7e investments53 Reviews - Pittsburgh, PA · Member since 2023 · 55 posts · 25 votes2y
@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.
- Member since 2023 · 22 posts · 3 votes2y
"would I be able to fund a hard money deal on a distressed property with a heloc or home equity loan?"
Technically yes, you could withdraw the money and use it as your down payment on the purchase of said distressed property. Cash out and put the money in your account, and you've effectively turned your equity into the liquidity needed for a down payment.
Finding a lender that does something requiring a remodel is regular, and to make sure the lender knows it's a business investment, do it under an LLC. Have a special purpose account for it. The LLC can make the payments on the personal HELOC, just like you could pay my mortgage (just a suggestion!) Anyway, you'll get varying requirements depending on what your experience in fixing/flipping is. If you're a noobie you might need someone to vouch with you or you might need varying asset requirements; but regardless, the cost of your rehab will be funded by the lender. It's done all the time in the hard/private money space.
HELOCs can be a great tool and the risk lies in how it generally behaves like a revolving line of credit. If you over leverage and you can't manage to pay chunks off at a time, you could be stuck spending a lot on interest all while not making a dent on the principal payments. (Think credit card).
The best way to do the deal is definitely going to depend on your exit strategy! Are you going to rent or flip? How long do you think it will take you? These are important things to ask yourself as well on your journey. - 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @John Currey:
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?
Hey John,
What is the exit strategy? Do you plan on refinancing or selling?
LuxePrivate Investments LLC 572 Reviews - Handyman · Hollister, MO · Member since 2023 · 15 posts · 8 votes2y
refinance would be the exit strategy.
- 2yDevin PetersonBusiness MemberLender · Sarasota, FL · Member since 2022 · 2k+ posts · 664 votes
Quote from @John Currey:
refinance would be the exit strategy.
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.
ProAlpha Capital56 Reviews - 2yErik EstradaBusiness MemberLender · Member since 2022 · 6k+ posts · 1k+ votes
Quote from @John Currey:
refinance would be the exit strategy.
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.
LuxePrivate Investments LLC 572 Reviews - Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes2y
@John Currey- thanks 1) do you already have a heloc ? if so - consider getting it redone and increased for the max possible so you will have this when needed ..if you dont have a heloc - apply for one and make sure you dont jeapordize the present purchase you are working on 2) If you plan to refinance and payoff the HELOC balance ...make sure you understand the numbers as the refinance would be considered a rental cash out refinance ...good luck
- Real Estate Investor · Chico, CA · Member since 2016 · 248 posts · 105 votes2y
Quote from @Account Closed:
@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.
You’re gonna refinance a 5.39% with a 30 year lock?!
- Pittsburgh, PA · Member since 2023 · 55 posts · 25 votes2y
@Eric Mcginn, yes, I've got that on my primary.
The rental line of equity is good for ten years.
- Member since 2022 · 2 posts · 2 votes2y
Quote from @Account Closed:
@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.
The 200k, was that both loans combined together or just one loan? Because of the terms ($200k at 5.39% for 30 years), I'm assuming it doesn't include the line of credit. Is the $200k loan a line of credit or mortgage? Did you really mean $90 (less than $100) for both loans or was that a typo? In a year, how would you consolidate the loans if one in on your primary residence and the other on your rental - two separate properties? Furthermore, why would you need to consolidate a $200k at 5.39% (fixed right?) for 30 years? Any light you can shed in helping better understand this financing would greatly be appreciated. Thanks.
- Pittsburgh, PA · Member since 2023 · 55 posts · 25 votes2y
@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.
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