Using HELOC as down payment on investment property

[Nicole Chang]

I currently own my home in Alameda, CA and owe 531k on my loan. The home was purchased for 834K two years ago and I’m considering using a HELOC to help with my down payment for an investment property that I would like to purchase. Is it best to try to find something to rehab and flip? Or is it best to use a different strategy to help with the down payment and not used a HELOC? Any advice would be appreciated!

[Ryan D.]

There is no risk in establishing the HELOC (assuming you one can be responsible with such a thing) - its a line of credit, not a loan. You only pull money out when/if you decide to, & functions like a credit card. Just remember that when you do pull money out, you will owe interest on it (~5% more-or-less right now), so whatever investment you put it into, you had better earn you more than 5% return. Be sure you calculate the expense of repaying the HELOC in a reasonable amount of time into your cash-flow analysis of any property you purchase with the funds. HELOCS often have shorter amortization periods (7, 10, 15 years, etc), and can have a balloon payment at the end of some shorter period.

Used carefully, they can be an excellent tool for investments.