Using HELOC?

[Lewis S.]

I am looking to buy 3 cash flow positive properties over the course of the next 2-3 years for retirement.

I own a house that has a good bit of equity, so I wanted to try to use that to get these properties, but need some advice.

I think it might be best to use "Other People's Money" to do this. My plan is to probably:

Find a a good deal on a CASH FLOW POSITIVE investment property and put down 25% I have already secured from a Home Equity Loan on my primary residence.

If it is advantageous and I can get a better deal paying cash, pay the rest (and any improvements necessary) with money from a HELOC I have already secured on my primary residence. If not, slap a mortgage on it right away.

If I use the HELOC money, I will wait 6 months while paying interest only on the HELOC

After 6 months I will refi the property and pay off the HELOC.

Then repeat!

Is this a pretty common method? Any holes in this plan? What problems might I encounter getting the refi secured after the 6 months to pay off the HELOC?

Any better ways you can think of that might work better?

[Dion DePaoli]

From the post it seem like there were two potential strategies:

1.) Finance the investment property with 25% down from HELOC (75%):
LTV Cashout on investment properties is capped at 70%. Holding 6 months will allow the property to be reappraised incorporating any repairs into the appraisal. Keep in mind you will need RE Value increase in order for you to get just 5% of your 25% HELOC contribution back from the investment property. This does not include any $ of improvement capital additionally injected into the property. In other words, this strategy is fine, but you will need sizable increases in value relatively 5% in equity increase is worth 3.5x cash in order to get your money out via C/O Refi.

2.) Pay cash for investment property from HELOC (100%): This is subject to the same LTV Max of 70% C/O Refi. This strategy might provide cheaper money from the HELOC at a lower interest rate than that of a closed end loan on the investment property. Assuming the HELOC is a lower prevailing rate. If the HELOC is not a better rate, option #1 might be a better option, if possible, your money is invested and a lower debt service and the same amount in each option of equity will be "trapped" in the property.

Debt To Income will be calculated by carrying both the HELOC, PR Mortgage, INV Mortgage. Also keep in mind, you will be required to have 6 months reserves to qualify for each investment property loan, which the HELOC can help resolve but it will also count against your DTI.

Just a bit of review, there is not that much different in the two scenarios when all said and done. The HELOC might end up being a fail safe if you can not qualify for both investment loans. Be prepared and plan to stay partially invested, more than likely, with a portion of your HELOC funds in either example.