Underwriting deals using HELOC

[Avishkar Sabharwal]

Hi everyone

I am planning to use my HELOC for down payments on deals. I have 3 burning questions that I have been trying to get answers to:

1. Given that there is an interest payment attached to the HELOC, it does eat into the cash-on-cash. What kind of cash-on-cash are the other more experienced investors would consider good during the initial underwriting when using a creative financing for down payment?

2. What would be your strategy in a scenario where its a large deal, and forced appreciation creates significant enough value to refinance and pull out the money to pay off the HELOC, but this creates a negative cash flow (I am not in this situation but trying to understand if this is a possible situation and has anyone been in this situation. If yes, then what my strategy should be if such a situation were to arise)?

3. How can I learn more about underwriting the deals using creative financing?

[Kevin Sobilo]

@Avishkar Sabharwal, is this HELOC against your primary residence? If so, you can look at the COC (Cash On Cash) return in one of two ways.

1) You can ignore the HELOC debt and consider whatever money you use from the HELOC as your cash contribution to the investment. So, the HELOC debt is PERSONAL debt not related to the business. In this way your COC will be more normalized.

If you wish to doubt the HELOC as business debt when evaluating your COC then your COC is INFINITY because you have ABSOLUTELY NO CASH invested only money from the HELOC which is debt/leverage. Your actual cash-flow may be small if you look at it this way, BUT your COC will be infinity because you aren't investing any money of your own.

2) With "forced appreciation" usually that pertains to 5+ unit properties where the value is based on income not comparable sales. So, you can calculate the value of a rehab before executing it to force the appreciation. In that case, since value is based on income I doubt you can refinance into a negative cash-flow situation.

If you are talking about 1-4 unit properties, yes a rehab could possibly get you in a situation that you describe but that is a personal investment philosophy decision. If you are trying to gain velocity and do more deals faster and believe you can, then being negative on one so you can go onto bigger and better deals might be ok. For most people, they would not want to do that and might refinance out less money and move more conservatively.

If you are going to have negative cash-flow, have specific reasons for doing it that will make you MORE money down the road.

3. There are so many ways to finance deals. I don't know what really good sources of info there are to educate yourself about them. I would underwrite deals and if you come across a deal where financing is an issue, look for a creative solution at that point. Learning from experience is often the way that will make it stick.