Using Heloc to buy larger multifamily

[Ian Dale Ibrado]

Will be purchasing a 4plex next year which needs roughly 80 to 100k down payment.  Im thinking, instead of a 4plex at 100k downpayment, Ill use 50k of Heloc to add to my 100k for a total of $150k to purchase a 6plex around 600 to 650k.  Heloc is around 8.5% interest and deals im looking at are 15% coc self managed, theres a bit of spread. Plan is, ill pay Heloc in a year from what I save monthly.  It will allow me to purchase a larger deal rather than a 4plex and be paid within a year.  Its not like ill be using Heloc the entirety of the loan.  What do you guys think?  

[Greg Scott]

Before proceeding you should become familiar with commercial real estate.

A Quad is valued the same way as single family, using the comparative market analysis approach. A six-unit is an apartment, a commercial property, and is valued using the income approach. The business plans for acquiring and adding value (in other words the BRRRR process) is slightly different.

[Kerry Baird]

The comment that @Greg Scott made is intriguing, because his experience is that those two units make a big difference in how the deal is done, from the business plan onward.  

I have bought 39 SFRs and cannot give guidance on your purchase, just a thought on the SFR side of things. I renovate when I have a turnover, and it does not disturb other tenants vs have a bunch of units down, or a bunch of tenants disturbed.

For finances, we can stay on the residential side of things with mortgages until 10 mortgages or when it gets challenging with regard to reserves, and then we used commercial mortgages which lenders expect ownership in an entity (go look into entity formation), and from that side of things we need to show income. 

In both situations we the buyer can ask for owner financing, and I do ask each time I make an offer.  A benefit to having the commercial property and entity is that we aim to utilize business credit, so that our personal credit and debt to income ratio is not tanked as we remodel or redesign or buy furniture.  (go look at business credit)

Next, some costs...really insurance...is very expensive on the commercial side (well, for STRs specifically, insurance is very pricey).  Lastly, the comment above that Scott made about business plans: I don't think we really considered business plans until we had a handful of houses. It is worth having a specific direction from the start.  The Operating Agreement becomes really important (so go learn about them, too).  

[Gino Barbaro]

@Ian Dale Ibrado

I've used my HELOC to invest in deals. As long as you have a plan to pay it back, I don't see an issue. I was able to cash flow from the deal which helped me pay for the HELOC. I had cash flow left over, and after 18 months, we refinanced and I paid back the HELOC.

If you can get into a bigger deal that will create more equity, then it makes sense. If you're making 15% and the rate is 8.5%, another reason to do it. 

Good luck

Gino