HELoan 125% LTV...Worth It?

Question

Hey everyone.  I'm looking at financing to get going on my first flip done exclusively by me.  I've been a part of flips before, but mostly on the sideline.  I've got great credit, but 1099 income (real estate agent), and all of my cash is currently tied up.  I have a bunch of equity in my home and found a place that will do a HE Loan of 125% of the LTV (https://www.sdfcu.org/home-equity-loans), but the rates and terms are less favorable than most traditional HELOC's.  I guess my questions are

1) is it foolish to take out $100,000 at a 7% rate over 10 years to do a flip?

2) Will the line make my DTI ratio too high so that I can't BRRR a property?  (I make a decent wage but I do have a car payment and my house payment - though both are more than paid for by HouseHacking with AirBnB...but the bank doesn't consider that).

3) Would it be better to go with a 90% HELOC, with no annual fee and no closing costs and just do a significantly cheaper flip?

Any thoughts or tips would be great. I have started contacting family/friends to see if they are interested in getting into REI, but I don't want to rely on that.

Matt M. · Answer

125%!!! I might have to check that out! We use hard money to purchase, and a mix of our cash and heloc to pay for the fixup. Does it operate like a line of credit, or do you have to take it all out?

Ours goes in and out of our line of credit depending on our deal flow. We only pay interest when the funds are deployed. If you're looking for a buy and hold, my guess is that you'll have to use private money to finance it. With any heloc, it might push you over an acceptable DTI regardless of which program you choose.

Carl Davis · Answer

If it were me, I would not use a HEloan for a flip, however I have limited flip experience so take the explanation with a grain of salt.

HEloan will draw all of the equity out immediately for the full amount and you will have to pay it back monthly regardless if you are flipping a property or not. This also means if you find a cheaper flip and do not use all of that money you will still be paying this off and could eat away all of your profit.

Maybe if you already had the property lined up and the numbers were all there but this is a much riskier option than a HELOC. Like Matt, with a HELOC you will only pay on what is taken out, plus you may only be paying interest during the initial draw period.

With limited capital you could pair the HELOC with some private money from previous partners or family members wanting to get in, this may create even less risk for you.

As far as the DTI goes I am not too sure on that but I would be careful doing a BRRR right now with the fed expecting to raise rates another two times this year. Even a good value add project could be ruined if the rates keep raising at the rate we have seen.

Just my two cents, hope this helps.

HELoan 125% LTV...Worth It?

Most Popular Reply