Quick Strategy for Acquiring properties using HELOC

[Chris Wilson]

Objective is to obtain properties via a conventional mortgage. Fannie Mae and Freddie Mac allow you to have up to 10 mortgages under their guides. These offer the best terms, in regards to rate, fixed 30 year term, and no prepayments. You can purchase with as little as 15% down. Ideally cashflow is the overflow goal, over time though 3-5 years-10 years etc, these principle balances will be reduced with payments from tenants, in addition the home prices will like be higher. At that point time once you have 10 properties, we would seek a commercial loan from either a local credit union or bank. These 10 properties would be paid off and combined into one mortgage. Freeing up you eligibility to purchase 10 more.

My position to fund this would be with a HELOC on your primary residence. This would be a line of credit that would allow you to draw on to either purchase homes ‘cash' or to use the money for a down payment. The terms on the HELOC are interest only for the first 10 years, and after that the loan becomes a 20 year amortized loan. We would likely either get a new HELOC 5-7 years down the road so that we have plenty of time prior to expiring in the draw period.

Scenario 1 ~ Purchase turn Key or Light Rehab property for cash at $150k from funds drawn from HELOC. ARV is $175k. Fannie Mae will allow you to refinance within the first six months and allow you to get back up to 75% Loan to Value up to the initial sales price. We would refinance a loan to $131,250.00. this would be a 75% of a position at the 175k Value. Take these funds and pay down HELOC, or use funds to acquire an additional property

Scenario 2 ~ Purchase full rehab at 100k with 50k in rehab. Using funds from HELOC to purchase and repair. ARV after repairs is 200k. Within first six months refinance up to 75% of the loan to value getting, however it cannot be higher than the initial sales price. Since the initial sales price is only 100k. would have to wait six months seasoning to cash this property out. Or at closing pay a general contractor the full invoice for repairs. After six months cash out to new value at 75%.

Scenario 3 ~ Purchase full rehab at 75k with 100k in repairs. ARV is 200k. Again first six months would only be able to take out 75k as that is the purchase. After six months take up to 75%.

Scenario 4 ~ Purchase Turn key property at 250k. Purchase as a conventional 30 year fixed with 15-20% down. Use heloc funds of 50k to 60k down payment. Use cash flow from the subject property to paydown heloc. You can use the HELOC funds as downpayment and purchase investment properties.

Scenario 5 ~ Purchase turn key property at 250k cash value is 250k. You can refinance within the first six months up to 75% loan to value, or after six months it’s the same. This allows you to pursue a cash property if you have to.

[Randall Alan]

@Chris Wilson

Hi Chris,

Fannie Mae has recently changed their guidance and it is now 1 year before you can refi... not six months if you bought the property financed through Fannie Mae in the first place. Also know that as you get more rentals and come closer towards the higher end of 10 rentals that the reserve requirements change for YOU. They want to see more cash reserves, and they are still looking at your Debt to Income ratio - which in all likelihood will become a limiting factor for you if all you are relying on is a HELOC as you move past your first property. I ran into a situation at about 7 rentals where they made me be on the deed for our personal house (when it was only in my wife's name). It used up one of my 10 slots. At our high point we got to 19 loans between us. Even with significant cash reserves, we still ran into occasional DTI issues and had to deed properties back and forth between us to have the income needed to get the next loan.

Here is the Fannie Mae Lending requirements for multiple properties:

https://selling-guide.fanniema...

https://singlefamily.fanniemae...

Here's some fun ones for you from Fannie Mae... if you were financing property number 7, you have to have 6% of the unpaid balance in cash-like reserves on the other 6 properties already purchased.  So if each of the first 6 homes had a $100,000 mortgage, that would be $36,000 in additional reserves - beyond the 6 months of reserves they would have already required to begin with!:

• 2% of the aggregate UPB if the borrower has one to four financed properties,
• 4% of the aggregate UPB if the borrower has five to six financed properties, or
• 6% of the aggregate UPB if the borrower has seven to ten financed properties (DU only).

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Helocs are very expensive right now, with the average being in the 8% interest per year range, with refi rates being in the high sevens last time I looked.  This is enough to slow us down right now, as little is cash-flowing at these rates.

We have rehabbed 6 houses in the past 5 years, and own 37 rental doors.  My first thought for you is that if you are a beginner, know that rehabs beyond the very lightest are not easy... especially if you don't have the background in them.  Your solution might be: I'll find contractors, right?  Managing contractors is not easy either.  It is very hard to vet them in advance, and once you are 'married' to them, divorcing them is difficult as well!  The in-between can be anything from 'smooth sailing' to a nightmare. You need a solid plan of managing expectations, and how cost overruns will be handled, liability insurance, how they will be paid (never in advance in full),etc (you could write chapters on this sentence...)   What I can tell you is that the really good contractors are expensive, because they know that rehabs seldom go as expected and they price that into their quotes, along with their profit.  The cheap ones are a dime a dozen, but you never know what you are going to get along the way (hopefully you are lucky!)  

To broadly answer your question though - your money obviously goes furthest using leverage and financing your perspective property.  You can do a refi the fastest, however, if you don't finance your initial investment (usually no seasoning requirement). We found that 2 cheaper homes cash-flow better than one more expensive home that is twice the price, but run your numbers to confirm.  

Regarding all the scenarios... your best bet is to buy the cheapest (all in)  property that will cash flow the best.  What you will likely find is that a C class property will cash flow better than an A class property per dollar you spent to acquire the house.  Keep in mind that there is a descent expense each time you finance... like $3000-$10,000 in fees when you finance a property... so doing that twice will add up in your expense column.  This just means you have to have all the better of a deal to begin with.  This will be your biggest challenge - finding a property that is cheap enough to absorb the expense of the rehab, while still being able to leave 25% in the deal and get your cash back out.  It is no small feat!  We have done it... but it takes a really great deal to have zero into the property after the refi!

All the best!

Randy