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Updated over 6 years ago, 05/07/2018
Using a HELOC to finance flips
My primary residence was a short sale I purchased a few years ago so I have built over $275,000 in equity built up. I also have an investment property rental with a mortgage and about $80,000 in equity on that. I have a third property owned with a partner that also has about $50,000 in equity. I was thinking about opening a HELOC on my primary to finance some cash flips in the area I own the other properties. I have done 2 flips in the area but the construction loan and closing costs took a nice piece of the profit so i was looking to finance it in cash. Is using a HELOC on my primary the best course to take, looking for alternate suggestions.
Thanks
@Jack Puso I did the same thing to fund my first flip. I live in a cheaper market and my equity is $135k but it worked out well. The interest rates are pretty low for HELOC and interest only payments. Overall, I would definitely recommend if you are able which based on your information, it seems like it would be a great process for you. It does take some time or at least it did for me, although I did go through a local bank. Hope it all goes smooth for you! Good luck!
I think using the existing equity in your primary home in order to fund flipping deals where you are able to keep more of your profits is an excellent idea. Using your own money is going to be your cheapest option for flipping.
We are current working on our third using our home's equity. Some will argue against risking your primary residence on an investment, however we mitigate risks through due diligence and by playing the numbers conservatively. We furthered our protection by creating an LLC before starting our latest project, and funds are always moved to our business account before spending a penny on anything related to the flip. Beyond that, we had to consider whether we would be able to cover the HELOC long term if the flip was a complete disaster. We have no intention of going there, but could if we had to.
Weird - why all the special "A" characters in my post? They don't show up when I try to edit the post...
I love HELOCs as a flipper. No points. Low interest. Best of all I don't have to spend 2 months filling out and sending paperwork on ten different houses each and every time I do a flip.
So, yes HELOCs are great. I have two, one on my primary, and one on a rental. Thank you Huntington Bank.
If you are very advanced you can use the HELOC as a down payment on a private loan and stretch it even more, but you might want to hold off on that until you have the numbers down better.
Thanks for all the input, although I felt it was the right decision, it is nice to hear from others who have successfully done it. I understand the risks but since I am a Realtor, as is my wife and have a full time 9 to 5 job, I am doing my research before starting any project. I will update the community in the future on how it turned out so someone else can learn from it.
Originally posted by @Jack Puso:
Thanks for all the input, although I felt it was the right decision, it is nice to hear from others who have successfully done it. I understand the risks but since I am a Realtor, as is my wife and have a full time 9 to 5 job, I am doing my research before starting any project. I will update the community in the future on how it turned out so someone else can learn from it.
Any update?
Originally posted by @Jack Puso:
@Kevin Yi I was able to open up my HELOC and purchase a foreclosure that is producing income while also flipping one more house in that time. Using the HELOC was def the right way to go!
Did you refi the foreclosure or are you just making monthly payments on the HELOC?
Making monthly payments, I will pay it down with my commission checks.
Hey Jack. I'm getting ready to apply for a HELOC to do exactly what you are doing, buying rentals and flipping properties. Question. After you've sent the HELOC money to your LLC, when sending the money back to yourself from the LLC after your flip has sold or been refinanced to keep as a rental, how do you do it so that you don't pay any taxes on that distribution amount since it looks like your paying yourself?
I just want to make sure i don't accrue any unnecessary taxes or pierce my corporate veil.
@Kafui Athiogbey unless you have chosen some (highly complex and ill-advised) strategy that requires your entity to pay it's own taxes, there is no taxable consequence to taking a distribution from your LLC. The income from the LLC is taxed in the year it is earned (getting reported on your individual 1040), not the year it is distributed.
Best of Luck with Your Real Estate Investing!
