Financing my first investment property

[Corinne Bogan]

Hi BP! So I am looking to purchase my first investment property in the next few months. I am planning to live in it for 1-2 years while in grad school, and then plan on renting it out. I'm trying to get creative with financing as I'm just starting out and either way will need some help from my parents. Here are my options:

1- Finance with a conventional loan with parents signing as a non-occupant co-borrower. This will allow me to put as little as 3% down, have a fixed monthly payment, have my name on the title, and I can eventually refinance this and take the entire loan over in my name. This to me seems like the "safe" option.

2- My parents would take a HELOC on their current house (which is paid off) to purchase a property. This will make me a much more competitive buyer with cash and increases my chances of getting something under market value (which is obviously the goal for either strategy). I've done a lot of research on the topic but what I don't quite understand yet is how to get the money out of the deal and "pay off"(?) the HELOC. Essentially a BRRRR strategy minus the "rent" since I would be occupying it for a short period of time. From what I understand the rent portion is important for a cash out refinance to show cash flow. I guess I could wait until I move out and rent it to refinance, but don't love the idea of paying a variable interest rate on the HELOC for up to 2 years. I don't want my parents to have this line of credit hanging over them as they go into retirement and want to be able to return them their investment as quickly as possible. I've heard time and time again that you make your money on a property when you buy it, so the HELOC seems like such an advantage, especially in todays market.

I'm extremely lucky to have parents that are financially responsible and willing to use their assets to help me build mine. I'm aware that this is quite a privilege that not many investors have starting out. The potential to be a cash buyer with a HELOC seems like such an advantage, but I want to completely understand how it works first. So, what am I missing or misunderstanding here?

The pros of option #1 are that I'm building equity with a low, fixed rate, and can eventually refinance the loan completely in my name, freeing my parents from the mortgage. However, the cons are that I will likely spend more $ on the property all together, am limited in the types of fixer upper properties I can buy, and therefore limited in overall ROI.

Pros of option #2 are that I am a cash buyer and can find a good deal under market value. I can use the HELOC to finance the rehab and can increase ARV and equity. Cons are that I won't be renting the property out immediately after rehab, and therefore can't do a cash out refi to return my parents investment, and even when the refi is done- the property is still in their name and I would need to buy it or figure out a way to offload it into my name (although I'm sure thats not the hard part). Either strategy I won't be cash-flowing for a while (unless I find a duplex) but I think using strategy two will give be a better overall deal. Help me think this through. Again, I am sure I'm misunderstanding some of how a HELOC works. I talked to a lender today and this is what I've gathered at least from our convo and my own research. Thanks in advance!