Does this HELOC logic make sense for a Rental Property?

[James M.]

Hello BP!

I'm a small time investor (when do you get to be big time?) with just one rental property. I am looking to obtain two more rental properties this year!

I currently live in a house with about 100k Equity in it and 120k left to pay off. So LTV HELOC as I understand it, I could get a line of probably 80-90k.

I have an oppurtunity with a family member for a non-arms length deal. I could easily save up for the down payment, but I wanted to see if the following logic makes sense if I used a HELOC instead:

1. House sale is 135k, could likely go for 150k today, it will appreciate by 7 percent over the next year or two.
2. Lets assume a full 20 percent down payment from the HELOC (27k)
3. Cashflow is about 450 a month, not including vacancy/capex/repairs, in which case real cash flow is closer to 150 a month. I plan to PM myself as I do today for a very long time and then PM to another later. I'm not too concerned with calculating PM costs into it until later in life when its either paid off or refinanced at a lower payment.
4. All combined the leverage would be a conventional loan for 80 percent and a HELOC for the other 20, none of my direct cash.

With all that in mind, the following questions come to mind about whether this makes sense or not.

• Technically, if I'm using the HELOC completely or majority of the purchase, would that mean my CoC return is effectively much higher since its not my own money (directly, I know its my equity) as long as I don't make my own payments on the HELOC?
• Does it make sense to use the Cashflow from my first property, and my second property to pay down this HELOC as a strategy? I figure after a year I could see where its at and refinance-cash-out (I have not tried this yet) and pay off the remainder, or continue to pay it off. This does tie up that rental money but I'm okay with that.
• Or, should I just wait to see if appreciation happen and refinance-cash-out. And pay off the HELOC?

To ease tensions, I am in a very grateful situation to where I have no debt (besides my current residence and rental) and bring in 10k of free cash flow a month, so defaulting on a HELOC pull of 27k is unlikely. I could/might do 50/50 where i do 13.5k of HELOC and 13.5k of my own cash.

Sorry for the long post, but does my logic of HELOC pay off hold water in this situation?