Using HELOC for down payment for rentals

[Mark Guest]

I am a new investor and want to start with building a portfolio of rental properties.

Is using a HELOC advisable for funding the down payment and renovation costs on my first property purchase? My end goal is acquiring multiple properties as mentioned in the Bigger Pockets article "A Slow, Boring, Incredibly Awesome Strategy...Real Estate Investing".

At a 80% LTV I have about $130K available for a HELOC.

Any thoughts or recommendations for a newcomer would be welcomed.

[Jennifer T.]

This is exactly what I do. I find my HELOC to be extremely helpful for my REI because of it's flexibility.

I tend to pay down my HELOC as much as I can each month. When I get to within having enough for a 20-25% down payment on the types or properties I typically purchase, I start looking for good deals. And then I made a mistake and bought a fixer-upper duplex with cash from the HELOC, planning to refi it after 6-12 months seasoning. Problems I never expected outlined below.

With that said, I always keep a healthy cushion available. on it.  For when I have large repairs or expenses that don't fit within my normal monthly cash flow.

A good example is coming up for me on Jan. 31st, lol. I mentally "know" my property taxes across all my properties (except my personal home) average out to be a total of $315/month. But, the reality is, that's not the way property taxes work. I can't pay them per month. I have to pay them per year. And they are all due on Jan. 31st. So Jan. is a month with an especially large expense chunk. Instead of setting up a "special" property taxes account, it's all just part of how I use my HELOC. I cash flow what I can. And use the HELOC to pay whatever I'm short.

Keep in mind a few "gotchas" about HELOCs.  At least they were for me when I suddenly took out a big chunk of it to buy a fixer-upper duplex.  Your mileage may vary.  Planned to refi it after 6-12 months of seasoning.  And then something happened on the way to the bank...

1. HELOCs are typically only a 10-year amoritization period.  Sometimes they are interest-only.  However, mine isn't and requires a good bit of principal pay down included with the minimum monthly payment.  It's enough to choke a horse!  Thanks to all the rental income I now have because of it, I can comfortably pay it.  But those monthly payments are crazy high as compared to the balance because of the shortish amoritization period.
2. They are typically a variable interest rate. The interest rate on mine has gone up 4x over just the last year. And there is nothing I can do about it, outside of refinancing. Which I don't want to do because then I lose all the flexibility I love about the HELOC to begin with.
3. On the subject of the large minimum monthly payment, it screwed up my debt-to-income ratio and that was one of the factors that blocked me from getting the refi I'd had planned. So close, but not quite good enough. Plus a lot of banks didn't want to "count" the rent on that duplex, until they saw it on my tax returns for at least two years. Heeellloooo 2019! I've finally owned that bad boy with rents coming in for most of 2017 and all of 2018. Plus the HELOC has been paid down a good bit. I've "teetered" back over to a good DTI.
4. It also lowered my credit score. At its worse, to the 620's. Another problem with my previous refi attempts. A high utilization of credit cards is a major negative factor for a credit score. And, apparently, so is a line of credit. Even a HELOC. Though it doesn't seem nearly as detrimental as a high utilization on 'cc's. I've finally clawed my way back into the 700's.

Some major lessons learned for me. On the bright side, that duplex was an amazing investment when I look only at the ROI. But when I consider the opportunity cost, smh. Ouch! It basically stalled expanding my rental portfolio for about two years.