HELOC, DSCR, or Conventional?

Question

Newbie investor here looking to do my first actual investment purchase. Currently looking into doing a BRRR or a buy and hold in the FL market. My wife and I have our old primary home that we recently moved out of and are renting that has 150K+ in equity that we could tap into via HELOC to fund the down payment for our next purchase and cover the remainder with a DCSR or Conventional loan?

Curious what the more experienced folks here think is the best strategy given the current rate cuts happening. Having two open loans for the property is not ideal as that's double closing costs but maybe that is a fairly normal strategy?

Any advice is greatly appreciated!

River Sava · Answer

Hey Luke -

Tapping into your equity through a HELOC is definitely a common way to fund a down payment, but like you said, having two open loans can lead to higher closing costs and potentially impact cash flow. It’s worth weighing that against the benefits of accessing that equity for future investments.

Since you’re considering DSCR loans, that could be a strong option, especially if you’re focused on rental income covering the mortgage—no personal income or DTI requirements needed not to mention the easy qualificaiton process compared to conventional. There have also been significant rate drops so might be worth exploring. Happy to connect and chat further!

Also, what part of FL? I am based in Tampa

Brittany Minocchi · Answer

If you know you could pull $150k of equity from the home, are you saying you don't think that's sufficient to cover the down payment, closing costs and reno costs of the next property? If you were to buy a $200k fixer-upper, how much are you expecting to have in rehab costs? $40k would go toward your down payment, say $10k to closing costs...that leaves you a pretty good amount. Then you'd rehab the property and refi into something like a DSCR loan to get around the 12 month seasoning requirement and pay that back to your HELOC or the loan you took out. Unless I'm missing something, it seems doable?

Luke Davis · Answer

Looking in Pensacola, FL area but my old home is in Tampa! Lived there for 7 years.

Luke Davis · Answer

So it seems the better options in front of us is doing a cash-out refi of our old primary home to pull enough equity out to fund the down payment of the investment home + any rehab costs and then BRRR that to get some of our money recouped?

The biggest obstacle I'm encountering now is the making up the initial down payment. Even a 200K home (fairly low dollar in the FL market) requires a 40K down payment which is tough to come up with without a hard money loan/HELOC combined with a conventional loan which would then be tough to make any cash flow. If you cannot BRRR the property to get some of your money back, then most of your up front costs will be stuck in the deal for a long period it seems? I am preferential to medium/long term rentals so my exit strategy would not be applicable for many years.

I make a comfortable living and have a surplus of money saved up but don't want to liquidate my entire savings accounts so I can get just one singular 200K property that may cash flow for a couple hundred bucks over the next few years.

Am I missing something or being overly cautious?

Patrick Roberts · Answer

If you've already converted your old primary to a rental and are no longer living there, you'll likely have a hard time getting a Heloc on it. Local banks and credit unions will be the best place to check for this.

As for the strategy, using a Heloc for the downpayment will get you into the deal, but how do you plan to get out of it if this is a long-term hold? I recommend having a plan to pay down the heloc within a relatively short time frame (1-2 years) as it's a revolver and is not meant for long term financing. Helocs are great for covering rehab costs or financing properties that are flips/BRRRRs, but I don't recommend using them to permanently finance the downpayment. If the line is converted or if rates suddenly rise (like they did recently), you could have a serious problem.

Derek Brickley · Answer

Hi Luke!

Generically, if you aren't living there currently, the terms on an equity line will be atrocious. If you need to access some of the equity, a conventional cash-out refinance will have the best terms.  If that doesn't work, then a DSCR cash-out would be a good alternative.  Then you could look at getting another property with a conventional or DSCR loan.

Note: Conventional will always have better terms, but will require more steps/verifications/paperwork.  Typically it is better to get as many conventional loans as you can first before entering the DSCR space.

For rate cuts - the Fed lowered .5% on their overnight rate!  So short-term equity lines, credit cards, etc. will start to feel that.  Mortgages and other long term debt has not been impacted.  For long term rates, the markets have already priced in 1% of cuts this year and 1% of cuts next year, so we will still see them taper down but there will not be a fall-off like a lot of us might hope.

Strategy: Agreed if you can get away with only getting lending on one property that will cut costs, but if you need to in order to scale then may be a cost of doing business.  Understanding your numbers first will be important to see if that makes sense or not.

Feel free to reach out if we might be able to help with anything here.

Melvin List · Answer

@Luke Davis If you can qualify for a conventional loan that is probably going to be your best bet. Happy to answer any Financing questions.

Robin Simon · Answer

Probably needs more info - is there existing debt on the current rental property?

HELOC, DSCR, or Conventional?

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