Using a heloc for a downpayment

[August Kleinschmidt]

Good morning BP,  my name is August. I've been a long time reader and lurker of the forums but have never created a forum question. I'll give a little backstory before I get to my question. My wife and I have been interested in real estate for about 5 years. We saved up for a down payment and purchased our first rental property in Springfield, Illinois last summer. We purchased a 3/4 bedroom 1.5 bath house that rents for $925 per month, and we were able to purchase the house for $54,000 and completed about $5000 worth of repairs and updates prior to getting it rented. I keep about 25% of the rent set aside for repairs, vacancy and cap ex (probably too much but wanted to be conservative) and the house cashflows roughly $300 per month. It is about an hour away from where I live and work so I have the property managed professionally.

Now to my question, I've been looking into purchasing another property and I'm hoping to get a little creative with coming up with the downpayment. My wife and I saved up for the down payment and repairs on the first house but it will take me several years to come up with that kind of money again. I spoke with my bank and I have about 40k in equity in my primary residence that is accessible. It's probably not enough to buy a house outright but I was considering using it as a downpayment on another property. What I would like to do is find a house similar to my first and use the HELOC as a downpayment. My understanding is that the heloc is interest only payments for the first few years. I would like to use the cashflow from my first house and the cashflow from my second house to pay down the heloc and then I would have two cashflowing properties and then wash, rinse, and repeat. It won't be the fastest process but it seems like a better way to scale then just saving up for the years to buy again. Does anyone conduct their business this way and do you see any gaping holes that I am missing? I realize that whatever property I purchase as my second rental needs to cashflow well enough to pay the mortgage on the house, have money set aside for expenses, and still pay off the heloc monthly. I figured I could speed the process along by using cashflow from house #1 as my wife and I are not living off the cashflow just putting back into the business. Thanks for any tips, advice, or input that you may have!

[Justin Dean]

@David Worker I live in Springfield and use Carrollton Bank. Their formula for HELOC is 90% of appraised value minus what you owe on the home. A simple example would be:

Home appraised for $100,000 and you have a remaining principal balance of $50,000.

$100,000 x 90% = $90,000

$90,000 - $50,000 = $40,000 available for HELOC

I did this on my primary residence and used the HELOC to pay cash for an investment property. I am paying interest only right now and plan to take out a mortgage on the house after the 6 month mark and pay off the HELOC. I will then have the full line of credit available to me to use and plan to repeat the same process.