HELOC only works for full cash property??

Question

I am not a novice by any means. I have a traditional rental, with a 15 Year mortgage, not cash flowing very much, but the equity is strong. and a buy and hold for retirement cashflow.  I also have a SOlo401k Investment property as well, which is cash flowing back to my Solo401k Account. Plus a personal home with strong Home Equity.

The question I have here is the HELOC strategy. I have around 130k in equity on the Traditional Rental Property. If I was conservative, I would get a HELOC at 90% of $115k @ 5.75%

How is it, that I can buy another property? Would I want to buy outright ($115k cash offer on a property)? This would put me out of the market where I prefer to buy (And im not interested in long distance rentals).

Would I buy something with a very small mortgage (Buy a $145k property) with a small traditional mortgage (30k)?

Or is there something I am missing.

I don't see the rents in my market, fulfilling the payments on the HELOC and the Traditional, in order to give me enough cashflow to be positive, let alone make the payments. YEs, I realize I am getting equity every day from the renter, and paying both the HELOC and the mortgage. But, I just don't see how these numbers pencil out.

If the HELOC is for direct cash buy outright, it makes sense in my head...but I just don't get how I would use a HELOC to buy another property which is not equal in value to the HELOC.

I did watch this video, and it seemed like I would be financing the property mostly through traditional products.  They also recommend owner financing. https://www.youtube.com/watch?v=lq5ag71CbJM

Thanks for any explanation.

John Warren · Answer

@Will Costello I have used HELOCs to buy properties twice, and neither time did I do a full cash purchase. I used it to purchase a four unit in Lyons, IL and then I used the HELOC again to purchase a six unit in Cicero. Both properties were purchased low enough that I was/will be able to refinance them to pay off the HELOC. In my mind that is a win as I am able to repay the LOC and retain the equity I "created" in the new property.

As you referenced, it would be great to buy something all cash (using your HELOC), but that can be pretty tough to do in most markets that are more desirable. The purchase prices just aren't low enough to allow for much of that.

Brian Sparr · Answer

Hi @Will Costello - not knowing the specifics of your market, I can't really say whether this strategy would work for you or not ... however, here are a few things to consider:

• Using a HELOC proves most beneficial when either: 1) a property doesn't initially qualify for traditional financing, or 2) you don't have access to any other cash for the purchase.  In the first scenario, you use the HELOC to buy, make your renovations and then do a cash-out refi into a traditional loan and you pay off the HELOC.
• This strategy is 100% financing - whether you use the HELOC to pay the full amount or blend it with a traditional loan or seller financing ... any way you slice it, you're financing 100% of the deal.  Depending on your local market, there's a good chance rental rates won't cover the debt payments and other expenses (as, it sounds like, you've already figured out in your own market).
• If you can qualify for both the HELOC and a traditional loan, I wouldn't use the HELOC to pay 100% of the price.  Today's rates on traditional loans are, generally, lower than 5.75%.  Do 80% with a traditional loan and create a lower blended rate for yourself.
• Introducing seller financing to the mix doesn't make the numbers any better.  Unless you can't qualify for a tradition loan (ie, low credit score, recent foreclosure, too high of DTI ratios, too many loans, etc), introducing seller financing is only going to make it more difficult for you to find potential opportunities.

Having access to a HELOC gives you options and potentially opens you up to deals that you couldn't otherwise complete.  But, that said, think of it simply as a tool in your belt - it'll be great for some situations and terrible for others.

Ted Felsberg · Answer

I’m newer here but from what I’ve read here is a scenario that might work. I don’t know the market prices of your area but let’s say you found a house that cost 200k and need 40k of rehab. If you found a hard money lender or private investor to cover 150k you could then use some of your heloc towards the 200k purchase price and then the rest to cover rehab costs. Then when it’s all done get a traditional mortgage and repay your lender and your heloc. I believe this plan would work very well if the ARV was 300k or higher. Like I said I’m new here so check that with someone who knows lol.

Will Costello · Answer

@Brian Sparr Great explanation. Thank you. I live in Vegas, which was once a very strong rental market. Now, while strong for rents, outpriced on purchases.

As I expected, it might be better to just use cash flow from other rentals until I have the down payment, as I don't generally want to seat BRRRR until I have more time and access to capital.

HELOC only works for full cash property??

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