Buy 100% in cash, then HELOC as a down payment to buy a business?

[Shiv P.]

Hello there, I wanted some guidance on how to make the best use of my cash.  Last summer 2019 I sold my business with the intention of using the proceeds as a downpayment to buy a much larger cashflowing business, utilizing the SBA 7a program.  However it has been almost 9 months now and I haven't found a suitable business - COVID obviously highlighted which businesses are the riskiest, so I have been focusing on "essential" ones.  

In the meantime, I'm still renting, and it may take me another 6 months to find the right business opportunity. 

But I am tired of renting, and am thinking of ways to deploy my cash, build equity instead of paying rent, and still have access to funds for a downpayment for a business acquisition.

The big assumption of course is that I am able to buy a business near the house I would buy.

Here is what I am thinking through, and if anyone has any guidance, I would really appreciate it -

1) Buy a house 100% in cash, let's say $400k.

2) Save money otherwise spent on rent, let's say $2k/month or $24k/yr.

3) When I find the right business to buy, take out a HELOC and use that as a down payment to buy the business. If we assume 90% of the equity value, that's up to $360k HELOC. SBA lenders would also feel more comfortable that I own real estate that they can use as collateral against the SBA loan.

4) Use the cashflow of the business to pay back the HELOC, and build back equity in the house over time.

5) Use leftover cashflow to cover living expenses and reinvestment.

Am I thinking this through correctly?

Has anyone else done this? 

Thanks in advance!

[Jonathan Styer]

Hi Shiv, 

Can I ask why a HELOC and not just a Cash Out Refi? Your rate on the HELOC will be higher and adjustable. Rates are crazy low now and it is a perfect time to lock in a 30 year mortgage with as near to free money as we will see in our lifetimes. Other than that, buying with cash is always preferred and you may well be able to get yourself a better deal buying with cash vs financing.