BRRRR'ing - How Tapping a Heloc Affects One's Credit Score

[Chris Hall]

Hey everyone, I'm a fairly green buy and hold investor in Raleigh, NC with two deals done now (long term buy and holds, single family residences, very basic), and I'm looking to keep building my portfolio in the next year or two with another purchase. Having just done a VERY light rehab on my latest purchase, I want to do a full-on BRRRR for my next investment to really get the benefits of buying something outside of the MLS. As I'm planning for that, I'm looking into using a combination of HELOC's and Private Lending (loans from family members) to do the next deal (buy with cash, rehab, then refinance with a local lender). My question is:

1) If I get a combination of Helocs on my current properties and then use that money to pay cash for a BRRRR deal, it appears that my credit score would significantly drop due to the credit utilization ratio being so high (ie, I tap out the Helocs and I'm using almost all of my available credit, not good, this would obviously be a problem for the refinance in 6 months correct?)

2) What insights can people give me on this process as it appears that this may not be a viable rout for me if the majority of my funds would be coming from the heloc lines. (how in the world would a lender refinance my loan if my credit score drops from an 800 to a 600 due to the HELOC leverage)

3) Is a business line of credit or other lending option a better alternative to this problem, and can a small investor secure one of these just doing a BRRRR here and there every other year?

Any help from the community would be great on this, I'm just trying to plan accordingly in setting up these lines in the next few months, but I want to know where I'm heading and not waste time on fruitless efforts! The devil appears to be in the details here. Thanks in advance.

[Jiri B.]

Hey @Chris Hall, I have done something very similar in the past, but its really hard to tell you the exact effect on that as there are more things to consider.

1. When i use my HELOC i typically plan on paying it back in less then 6 months otherwise it just cost me more on interest then if i would be just purchasing it with loan directly.

2. I don't think your credit would drop that much. When I use personal funds, it usually just drops 10-20 points because of the credit utilization. My lender never had issues with that, but you do have to make sure you mostly payments can cover both the HELOC and the new loan unless you just want to pay it of during the closing so the lender knows you don't over extend yourself with monthly payments.

3. Getting business credit line was always hard for me. The lenders would do minimum of 20k and no more then 10% of annual income so you would need to show at least 200k annual revenue to get 20k. So that just did not work for me in the real estate investing.

Unless you can get great deals paying cash, then just doing 20% LTV loan right aways is not that bad. What I typically do, is to use the current properties as equity for 20% down and use my other cash for rehab. Than I just pay of the rehab first within few months. Then every year, i just take the property from previous year, refi and close on new property at the same time.. So i technically only do 1 closing without bringing any cash at all.