Using a Heloc as a downpayment
Member since 2019 · 1 post · 0 votes
Hi Everyone,
I'm looking to buy my first rental property and I've seen countless videos and articles about using a HELOC for a downpayment on the property. I don't have enough money for a downpayment but want to start Real Estate Investing now so I'm interested in using a HELOC
My question is:
If I take out a HELOC for a 25% downpayment of a condo here in Miami, so let's say $35,000 of a $140,000 property, how do I pay back the HELOC's monthly payments and the standard 30-year fixed rate mortgage of the rental property at the same time while making money. It seems like it would literally take years to pay back the HELOC.
I feel like I’m missing something in the strategy.
@Michael Cabral How you choose to use the HELOC will depend on what rate you get and the strategy you choose. I've seen fixed HELOC rates at 2.5% for first two years and others that start at 8.5% variable. So really, that will determine whether you use the HELOC for short term use (flip, brrrr, etc) or long term (past one year). As most HELOCS end up being variable at some point anyway, it would be good to be cognizant of your strategy timelines and how that HELOC rate will play into your costs.
We choose to use our HELOCs as short term financing or credit reserves for quick usage and partner with hard money or private lenders for the majority of the financing up front. We then refinance out after value has been added and pay out the original capital financing(private lender, hml, heloc, etc). Or the HELOC funds could even be used as payments to a private lender or hard money lender who finances the 80-90% of the property purchase. Again, it really is about buying the right property that allows you to add value and refinance out at some point to pay back original capital providers.
Good numbers and buying right will make the above options work. Hope that helps!
the details are incredibly important here
If you buy a retail house and use the HELOC for the downpayment, this leaves you with no equity. It's very likely that the situation you described will be correct, no cash flow.
In real estate, you make money when you BUY. You need to buy at a discount and you need to buy something that will cash flow, not all houses will work. Also, the less equity you have the less likely something is to cash flow
the real thing you need to learn how to do is buy at a steep discount, if you're buying retail then it'll probably be a lousy investment no matter how you pay for it.
HELOC payments vary by product, some are amortized and many have the payment set by the outstanding balance, mine is 1.5% of outstanding balance in monthly payment.
the IDEAL way to do this would be to use the HELOC to buy the house in full, then refinance on the back end after it's rehabbed and rented. trying to go too fast often encourages people to do ANY deal rather than a GREAT deal, and they often don't make money.
Hi Michael,
Condos in Miami typically wont cashflow even with using cash for 25% down. You would be better off looking at getting a duplex or a fourplex with an FHA loan for as low as 3.5% down and living in one of the units for 12 months then you should have a better chance of finding something that can cashflow.
Hello Michael, that is exactly what we did three years ago. We got a HELOC for $196,000. We used $113k to buy a 1/1 condo in the up and coming Allapatah area near Marlins Park. We spend $17k to update it using our credit cards and Home Depot and Lowes 0% interest for 12 months. We chose an Interest Only option variable rate. It started at 4.5%, but it has gradually climbed to 6.61%. It cash flows about $400 every month. We rent the unit for $1,385. The HOA fee is $258/ month, property taxes are about $180/ month and the HELOC interest only is $525, but slowly decreases every month since I apply $400 towards the principal. The HELOC balance has dropped to $95k AND the condo has appreciated to about $150k. I thought of doing the BRRRR, but the refi was going to eat about $7k of the equity. Instead, I will probably sell it in 2-3 years after the HOA updates the building which will increase the condo values and as you may now, the City of Miami is spending $208 million for the I-95/ 595/ 836 project which I believe is going to create a boom for that entire area.
@Michael Cabral How you choose to use the HELOC will depend on what rate you get and the strategy you choose. I've seen fixed HELOC rates at 2.5% for first two years and others that start at 8.5% variable. So really, that will determine whether you use the HELOC for short term use (flip, brrrr, etc) or long term (past one year). As most HELOCS end up being variable at some point anyway, it would be good to be cognizant of your strategy timelines and how that HELOC rate will play into your costs.
We choose to use our HELOCs as short term financing or credit reserves for quick usage and partner with hard money or private lenders for the majority of the financing up front. We then refinance out after value has been added and pay out the original capital financing(private lender, hml, heloc, etc). Or the HELOC funds could even be used as payments to a private lender or hard money lender who finances the 80-90% of the property purchase. Again, it really is about buying the right property that allows you to add value and refinance out at some point to pay back original capital providers.
Good numbers and buying right will make the above options work. Hope that helps!