HELOC Arbitrage for Down Payment Next Rental

[Mark S.]

Considering some HELOC arbitrage and essentially buying next rental property with practically "no money down."

AHP Servicing: 10% preferred return

Current HELOC Rate: 4.49% variable

AHP net return: say 7.5% (after taxes at ordinary income)

HELOC effective rate after deducting interest (using HELOC funds as down payment on rental property): 3.05%

Net arbitrage effect: +4.45% (after taxes)

10-years interest only payments of $101/month.

Monthly initial AHP distribution (before compounding): $235/month (reinvested).

Net benefit: $134/month. Likely full liquidity, if needed. Can pay off completely at any time. After 10 year hold, IRR about 5.36% or $46K+ net after 10 years assuming full HELOC payoff. This is in addition to the returns generated by the rental property itself that these HELOC down payment funds helped me acquire.

Risks: interest rate risk (have fixed lock feature on HELOC, if needed), investment risk w AHP, primary residence lost if defaulted (extremely unlikely as I have other assets I can tap, if needed).

Would pay the $101 out of pocket (monthly cash flow from the rental covers this, but would probably keep CF in business acct and pay out of personal funds).

The gist: HELOC/AHP arbitrage, cash flow effectively services HELOC interest only payment, invest lump sum cash, otherwise buried under house, at 10% instead.

What you think? What might I be missing?

[Neil Henderson]

I'm sure there are people who do this but I'll be honest, it freaks me out. I look at HELOCs like really cheap hard money. Personally, I think you're better off using a HELOC as a short term loan to acquire a property and then refinance out of it. I'm in the process of doing this very thing.

There are no guarantees with AHP and a lot can happen in 10 years. The AHP investment could go south, the credit markets could crash and the bank could call your HELOC due.

Think short-term money with a HELOC.