Delayed Financing (Using HELOC to purchase Second Home/STR/Invest

[Christy Flora]

We have quite a bit of equity in our home and are considering using a HELOC to become a "cash buyer" for a second home (Short Term Rental). The plan would be to pay back the HELOC using rental income (or just our income if we don't have renters) for about 6 months to season the loan and hopefully build a tiny bit of equity (both through hopefully natural appreciation and forced appreciation in the form of renovations). At that point, use delayed financing to refinance the "cash" home to a conventional mortgage (with a lower fixed interest rate than the interest-only HELOC rate) with a lendor. If this is fairly straightforward, we can then pay down the HELOC and then rinse, repeat with a third property when the time is right.

My question is, who has used this strategy successfully? How hard was it to get a lender to create a mortgage on the "cash" home. I'm assuming with a straight-forward yearly rental (with leases) it's easier to get the mortgage than with just a few months of STR income. Would we need to wait a year or two to build enough of a track record with lending?

[Justin Beasley]

Just completed a similar process. There are some advantages to this strategy but it is also very risky. 

Here is what I see as the advantages...

1. You have closing cost on the HELOC but no down payment as you can take a maximum of 75% of the appraised value.

2. You only have to make the interest payments if you desire and can maximize cashflow or limit your cash out of pocket while completing renovations. 

My personal experience and advice is to use the HELOC to purchase a value add property as a "cash" buyer. Immediately add the value through a renovation. Once reno is complete cash out refinance or sell the property and collect the profit.

I use my HELOC to move fast on deals I KNOW I can make money on and like to have options for how I could hold or liquidate that property.