To HELOC or not to HELOC...

[Eric Schenck]

I recently bought my first home (primary residence) with a no money down VA loan for $135k. I got a low price because it was an estate sale and VA appraisers appraise no higher than the VA loan amount. My neighborhood average is around $175k-180k according to Zillow. I only have a small amount of equity so far.

1.) Would anyone recommend I get a new appraisal to increase the equity to apply for a Home Equity Line of Credit (HELOC) to begin RE investing?

2.) Will a new appraisal increase my property taxes (currently for $135k house)?

3.) If anybody else has experience doing this, was it worth it?

I want to be factor in as much as I can.  Any advice is greatly appreciated! :)

[Jeremiah B.]

Free advice here as well, but here's my take: No. You should NOT get a HELOC yet. Here's why:

• Because you just purchased the property, any appraiser will default heavily towards the price you paid, and their analysis will basically justify the 135K price tag.  This will be true for at least 6 months.
• Even after 6 months, I'm not sure that there is enough meat on the bone to justify a HELOC. HELOCs typically go to 80% LTV, meaning if your house is worth 175K, the total amount lent will probably not exceed 140K. Given that you owe 135K, the HELOC would cap out at 5K. That's not enough to justify the expenses (at least $500) and not enough to start investing. Note that some banks may go to 85%, but that's rare, and doesn't change the overall story.
• Using a HELOC may over-leverage you. i don't know your personal story, but based on your message, I worry that if you got a HELOC for an investment, that you would be cash-poor. My rule #1 of investing: Never be cash poor. Expenses come up, and you need to be able to not only pay them, but to pay them and sleep at night.
• Related to the above comment, this would also put your primary residence at risk if something goes wrong with the rental.  If I had a rule #2, it would probably be to protect my personal home and security - and this move would put that at risk.

Using a HELOC to support investing can work, and it can be a good idea. In fact, I've done it for a couple years and had great success with it. But my personal take is that it's simply not a fit in this situation.

Happy hunting.