Using a Heloc- Pros and Cons

[Erin Whalen]

I am looking to buy my first rental property (SFR). I have a substantial amount of equity in my primary residence, which would allow me to get a HELOC and thus, cash, to start investing. Are there any cons to this route other than losing my house if things go south? Or even pros I might not be considering?

I would like to use cash initially for purchase and then take out a conventional mortgage once the property is fixed up so I can keep my residence and investments separate.  Does this help lower the risk?  I am concerned about qualifying for another mortgage since my regular job is not high paying.  I do have a good sized emergency fund that should carry me through most issues and vacancies, but I would be mostly relying on rent payments to pay off the mortgage.  What do banks look at to determine how much they will loan to you?  Is it different on an investment property than a personal residence?

Thanks for your help!

[Paul Defngin]

It’s a great idea as long as you know the risks, which looks like you have already touched on already.  

That said, having a HELOC is great idea so you have access to your equity quickly. You can, like you already touched on, use the line of equity to pay cash for a property (depends, of course, on the HELOC amount you have), then refinance using delayed financing to payoff the HELOC or use the HELOC to put down a larger down payment if financing the investment property. There was also an article here on BP @Andrew Postell about you creating an LLC, then use HELOC to lend to your own LLC to purchase and renovate, have the LLC be the mortgage holder on the property, record the lien at the courthouse, then refinance to payoff the LLC, etc. Creative idea or you could just do the delayed financing. With delayed financing just list your renovation on the Settlement Statement/HUD-1 when you purchase as a cash out.