Should I use a HELOC for first my first flip or find other means?

Question

I'm new to real estate investing and Im looking to flip my first home. I have a relative that has some flipping experience (2 successful flips) kind of mentoring me along. He has used hard money as well as a line of credit from Chase for his homes. My home has an estimated $100,000 or more in equity in it. From what I've learned it seems that a HELOC is probably the easiest way to gain funding but at the same time it comes with risks if the flip isn't successful. I have a decent credit score (740ish) and decent income.

Should I go hard money, HELOC or since I have an LLC, try to get a line of credit?

Jeffrey Blackman · Answer

Hi @Jeffrey A., please accept some thoughts from Jeffrey B.

Welcome to the craziness that is real estate investing! I am both an investor and licensed mortgage broker. I've financed deals using equity from my home and loans from others. You are going to get conflicting responses on this because a lot of it comes down to your plans and your tolerance for risk, which are things known only to you. You mention having a mentor. Have you considered collaborating with them where you could pool your resources and directly benefit from their experience? This would also allow you to get better pricing from lenders. Otherwise, you may be limited to doing deals that are less than or equal to the equity in your home, and miss out on some bigger opportunities.

That said, fix-and-flip loans will have higher fees and interest rates than most HELOC's. However the difference may not be as significant as you think. I'll do something that appears to be taboo on BiggerPockets, I'll share my rates and fees.

Today, we were quoting interest rates between 10% and 12% for (1) a first-time flipper - 0 flips, (2) with a credit score in the 740's, and (3) putting only 10% down with us financing 90% of the purchase price and 100% of the rehab. (The difference in rate depends on the deal structure, e.g., the ratio of rehab dollars to purchase price.)

Like a HELOC, you only pay interest each month on the loan. If the rate on your HELOC is prime, that would be 7.5%. So the difference between prime and our 10% - 12% would be 2.5% - 4.5% per year, or 0.208% - 0.375% per month. That translates into $208 to $375 per month on a $100,000 loan. You mentioned the risk of an unsuccessful flip. You have to decide if it's worth putting your house at risk to save $200 to $400 per month. If all goes well and you complete the flip in 3 - 6 months, you would have saved between $600 and $2000 in interest. Again, your call on whether it's worth putting your home at risk for that. If the rate on your HELOC is higher than prime, then your savings will be even lower.

We think we have the lowest fees in the market. For a $100,000 loan, we would have to charge 2 points ($2,000) for originating the loan. That's because it's as much work for us to originate a $100,000 loan as it is to originate a $1,000,000 loan, and we need to make some money. In theory, since we don't have a prepayment penalty, you could borrow the money, complete the rehab and pay off your loan before your first payment was due. Then we'd make no money at all.

The only other fee we charge for this program is a flat $1,500 services fee. That's it. This fee covers all other services from us including underwriting, appraisal, legal, wire transfers, etc. We do not charge any of the junk fees I've see from other private lenders. So, for a $100,000 loan under this program, your total loan fees to us would be $3,500. And, since we don't require reserves for this program, once we add in the 10% down payment, only $13,500 would be needed to close. We can typically close this type of loan in about a week. (We have other fix-and-flip programs we can close in 3 days or less.)

My take is that for very small loans, a HELOC may make sense, because we do charge small origination and service fees. But as you point out, using a HELOC has some risks. As your deals get larger, especially when they are bigger than the equity in your home, a fix-and-flip loan may be worth considering.

I'm happy to share my experience as an investor and as a lender. Please let me know if I can be helpful to you. Best wishes for your first deal!

Jeff

Joshua Janus · Answer

Using a HELOC is great. Focus most of your energy on the actual house, the spread, the team and the execution. That will have a much larger impact on your outcome versus the debt product.

Gene K. · Answer

I'd recommend a HELOC for your situation, especially since there is already good equity in the project. The rates will be lower and will allow you to maximize profits. Should you decide to do this full time and do more than 1 flip at a time, private lending and fix&flip loans will be the way to go. Just make sure you set up a LLC to rack up the required experience. Good luck!

Zachary Deal · Answer

HELOC for down payment is a good idea, if you can't fund the entire purchase price + rehab amount with the HELOC a combo of HELOC + hard money is a great way to get started.

Jason Potrzeba · Answer

A HELOC is a great way for you to self-fund the improvements. It also allows gives you greater flexibility.

Plus, once you flip the home and make a few dollars, you should be able to pay the HELOC to a zero balance as well as having extra funds to throw in your war chest. Then it's just a matter of finding your next flip and rinse/repeat the process.

Justin Landesman · Answer

Great question, @Jeffrey A. ! I completely agree with @Ashish Acharya's points about the cost-effectiveness of a HELOC and the potential credit implications if it’s secured by your primary residence. As both an investor and a mortgage broker who has personally used both options, I can say there are benefits to each.

It ultimately comes down to comparing the two side by side based on your specific situation. Many real estate investors opt for a fix-and-flip loan because they’re relatively easy to obtain: no personal income verification (no DTI requirements), and you can often borrow up to 90% of the purchase price and 100% of the rehab costs. This convenience and leverage can justify the higher cost of these loans.

Personally, I prefer using a HELOC because I only have to apply once and can then tackle one or two projects at a time. The equity in my primary and other properties, combined with my income, provides the flexibility to borrow as needed—and I only pay interest on what I actually use. That said, this might not work for everyone, so a fix-and-flip loan can be a great alternative.

My team and I work with investors nationwide who face these same decisions. We often need to ask the right questions to help determine the best route for each individual. It’s great that you’re taking the time to weigh your options before jumping in. Feel free to reach out if you have any questions or need help determining the best path for you.

Mills Thumser · Answer

Hi Jeffrey! Exciting that you are looking to get started with your first flip. Let's connect, I'd love to hear more about your goals for your first deal!

Peter Mckernan · Answer

I would go HELOC for sure that would be best as others were saying the lower cost for the money changes between paying a higher rate for a personal line and typically personal lines they want a higher monthly charge as well independent from the interest rate.

Ashish Acharya · Answer

@Jeffrey A. Using a HELOC for your first flip can be cost-effective due to lower interest rates, but it risks your primary residence if the project fails. Hard money loans offer fast approval and don't risk personal assets but come with high-interest rates and fees, which can be tax-deductible as carrying costs. A business line of credit through your LLC protects personal assets, builds business credit, and may allow interest deductions, but it might be harder to secure for a new LLC. If you're confident in the flip and have a contingency buffer, a HELOC can work. For less risk, consider hard money or a business LOC.

Remember that LLC might help in tax savings if you are going to have decent profit. This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Sofia Komrskova · Answer

I personally would do a HELOC. I believe the cost-savings far outweigh the risk. Having a line of credit is like having your own personal private money lender. Hard money is expensive.

Some questions to ask yourself to assess risk:

Do you have access to a reliable contractor who can complete the work on time and stick within a budget?

Are you comfortable analyzing ARVs, purchase price, 70% rule, rehab costs, holding costs, etc

Should I use a HELOC for first my first flip or find other means?

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