First Lien HELOC Strategy

[Roberto Westerband]

What does the BP community think about 1st lien HELOCs as a way to free up equity in your primary home for investment purposes? If anyone has gone through the process, can you give any advice as to whether you recommend the strategy or if it is not worth it?

HELOCs usually have a 10 year draw period interest only before amortizing out. 

• If you have a 1st lien HELOC, what happens to escrow for taxes and insurance, can it be waived and paid out of your own pocket or is it tied up into the monthly payment?
• With regards to recourse vs. non-recourse loans, would putting the HELOC in 1st position allow a bank to come after personal assets in the event of a default?
• Are there any banks/credit unions that charge LIBOR instead of Prime on HELOCs?

[Arlen Chou]

@Roberto Westerband on the investment property I will pull a standard commercial loan and have the property stand alone. At that point my current HELOC will be free to be used on the next property and I will rinse and repeat, so "yes" this is a financing variation of BRRR.

@Christopher Winkler I live in the SF Bay Area so I have had a great run of appreciation over the past 13 years of ownership, almost 3x to be exact. I had also been building a relationship up with my lender over the past half decade, so they allowed me to add the value of a second property to my HELOC. There is nothing tying the loan to that property, everything is against my primary residence. My total debt to value on my primary is still less than 30%. I kept the monthly payments the same from my original 30 year fixed to the HELOC, but the pay down rate is substantially higher with my new loan. In my case, on all of my properties, appreciation is the "steak and all of the sides" of my investments and the cash flow is the Merlot that goes with the meal. I do not go after properties that cannot support both sides of the equation: appreciation + cash flow = wealth.

I really like the idea of using a HELOC because it is essentially a giant credit card. No more rushing and fighting for a loan during the purchase phase of a property. I now have the luxury of shopping a commercial loan at my own pace. It also allowed me to act as a "cash buyer" when I went after the 6 plex and it will do so into the future.

The obvious key to this strategy is that you have to be able to buildup to a large enough HELOC. This is not a "get rich quick" strategy. It literally took me years to get all of the pieces into place, but now I have a huge amount of freedom and flexibility.