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

[Ian Dale Ibrado]

Hi @Gino Barbaro, I was thinking of paying it back within a year using cashflow from combined rentals. Besides, i wont be using the Heloc for the entire down payment, probably less than half of the downpayment.. Its just for me to buy a larger deal rather than a smaller deal if i used my own savings. 

[Joshua Christensen]

Ian, I'm all about creating long term cash flow.  6 is more than 4.  Simple math really.

It just has to make sense and to Gino's point, as long as the numbers work and you can pay back the HELOC, why the heck wouldn't you.

To Greg's point, buy the asset and then stabilize it. Pay it off with a commercial DSCR refinance loan once you've gotten the rents up to an amount that will allow you to cash out on your HELOC.

I like using my HELOC but only in short-term scenarios because it's a floating rate and I can't control when or how the bank will make adjustments to the payback variables. Additionally for tax purposes, you have to make sure a personal HELOC is not a problem for the accountant on your business LLC taxes (usually not, just a precaution).

Rinse and repeat my friend.  Happy investing.

[Brian Plajer]

I used a HELOC for my half of a down payment for a vacation rental property. It hurts, in the short term, because the adjustable rate is about 9.4%. However, that's cheaper than hard money and it got me in the game. I knew I'd have a large payment and I hope to refinance the property if rates eventually come down. In the meantime, I use my W2 income to pay the HELOC minimum and try to through between $500-1000/month toward the principal to pay it down.

my point is you have to pay some how and if the hello is your only option to get in the game then I say go for it.Good Luck!

[Ian Dale Ibrado]

@Brian Plajer that is exactly what Iam planning to do. It will allow me to purchase a larger deal by having access to heloc and pay it down within a year 3k per month from combined cashflows from other rentals.  It is similar to using a private lender to get in the game.

[Chris Martin]

Regarding "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." Well, yes, completely from a financing perspective. Look at any of your SFR loan documents. They are 1-4 family residential, government subsidized (through Fannie Mae) loans. All the apartments I bought were financed/refinanced through commercial lenders because they were >4 units. Yes, Fannie Mae does have a multi-family lending arm, starting at a lower limit of $1M for 80% LTV. But I dealt in cheap properties and in mid-2010s, couldn't pencil a $1M loan for an 18-plex. Today, I probably could.

Financing a 6-plex is a PITA. That's why there aren't many, compared to 4-plexes and duplexes. 

[Max Emory]

@Ian Dale Ibrado, ensure you have multiple exit strategies to pay back the HELOC. Rental cash flow usually takes a while to become consistent unless you acquire a unicorn of a deal. So, just make sure you at least have a plan B and plan C to pay back the HELOC behind your plan A (rental cash flow).

[Ian Dale Ibrado]

@Max Emory I can pay it off within a year with just cashflow from all rentals combined but worst case, I am saving too.. I can pay it off within 6 to 7 months but would prefer to have cf pay it off so i can have some reserve funds from savings

[Max Emory]

Quote from @Ian Dale Ibrado:

@Max Emory I can pay it off within a year with just cashflow from all rentals combined but worst case, I am saving too.. I can pay it off within 6 to 7 months but would prefer to have cf pay it off so i can have some reserve funds from savings

 Sounds good, @Ian Dale Ibrado! You sound like you have experience with rental properties so I'm sure you'll do well. I just said that in case you didn't have experience and were listening to those who sell the "replace your income with rental cash flow in 90 days" idea. More times than not, it takes a few years for LTRs to show consistent cash flow depending on the model of course.