Use HELOC as down payment or cash purchase?

Question

Hi guys! Newbie investor here! I just closed on a HELOC of my primary here in Tampa, FL and was able to pull $185k. As you all know the market here is crazy and homes are on a steady incline. My wife and I are following our current "niche" and going STR in the west coast of FL around Tarpon Springs/Holiday/New Port Richey area. With 2/2 single family homes going for $160-$200k, would you guys suggest paying for a property cash or using the HELOC funds as a down payment for multiple homes? I understand to keep in mind of the prime rate (mine currently is at 3.25%) and the ability to pay off the loan asap which is why I am leaning towards using the funds as a down payment/rehab. I also have reserve funds that I am able to use on the rehab and we both have w2's jobs. The goal is the establish the first rental property and move on to purchase another property off of that. Any insight is appreciated!

- Mo

Account Closed · Answer

Hello Mo, feel free to take or leave my advice: I would tend to agree with @Michael Baum that you should think about using the HELOC to provide the down payment on several properties. As long as you are carefully considering the #'s to make sure that they work, then it seems like you'd be doing yourself a favor by not tying up all of that equity on one deal you maybe purchase in cash.

Consider an oversimplified example: With that 185k, let's say you bought one STR in cash. Without a mortgage, maybe you are able to earn $1500 month in net cashflow. Alternatively, let's say you use your HELOC to buy 4 STRs with a 20% DP. Assuming that your PITI is around $1000, and that each of the other places was performing the same as the all-cash one would have, then you're left with $500 per property for a total of $2000. To be fair, purchasing and running 4 properties is a lot more work, but you also benefit from appreciation and equity over time.

I have a HELOC which I have utilized to buy 1 duplex and co-purchase 2 STRs. I would always advise caution, but you mention having reserve funds and W-2 jobs, so it sounds like you are prepared to leverage the debt carefully.

Celine Crestin · Answer

Unless you're doing the BRRRR method, I would also suggest using the funds to purchase multiple properties. You'll be building wealth on both cash flow and appreciation faster having a portfolio.

You can do it in stages so as to not feel overwhelmed and so you can apply lessons learned on the first to the next one and so on and so forth. :)

Account Closed · Answer

@Celine Crestin has a good alternative point: If the right deal were available, you might conceivably buy a property in all cash (using the HELOC) and then refinance most or all of your money back out. This is a bit more involved option, so I also like Celine's point about learning in stages.

Nirmal Khanderia · Answer

@Mo Maktari

I also recently pulled HELOC on my primary residence. My plan is to purchase 3-4 STRs using HELOC as down payment over next 2 years. I have one property under contract in Florida. I plan to learn the ropes of this business at least for next 6 months and then start looking for the second property.

Also consider 10% down second home loans as well as 15% down DSCR loans in order for your HELOC $$$ to go further.I am also planning to use the cash flow from the STRs to buy another STR or pay down HELOC so that you can use it again.

Bud Gaffney · Answer

HELOC !

Ryan Moyer · Answer

It's good that you're cautious about over-leveraging.  Remember, with a HELOC you don't have to take the money all at once, and you only pay interest on the money you use.  So if you want to use it to buy 4 (I would prefer that to just buying 1 with cash) you don't have to buy all 4 at once.  You can buy 1 or 2 and see how they go, make sure they are hitting your numbers, etc before pulling the trigger on the others.

Celine Crestin · Answer

I mean...who's to say? ;) It sounds like you already plan to rehab and rent the property you purchase; is that correct? Then refinancing is in general the same principle as applying for a mortgage to start with....What makes you feel this wouldn't work for your situation? (assuming you have enough cash to purchase something to begin with?) You do have to buy correctly to start with, but it is a means to get into a property and keep as little cash in it as possible while holding. However, with the amount you currently have I think you'd only be able to do one that way and then finance the remainder homes you buy.

Branden Mohler · Answer

I would have to agree with you @Celine Crestin if your not able to BRRR the properties ( which I'm assuming you can't as there is little left after the purchase price.)  then getting multiple properties would be the way to go.

Michael Baum · Answer

I would probably use it has a down payment on a couple of places assuming you leave enough to outfit each place very well.

Mo Maktari · Answer

Account Closed first off, thank you for thoroughly helping me understand and painting a picture of that option. The more and more I think of it, I am leaning towards just using a portion of the HELOC to put down on a DP on the first property, get it going, then running the cycle again. That method at least puts me in control of making the payments and managing the #'s at my own pace at least until I can get a grip of this new venture.

Use HELOC as down payment or cash purchase?

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