Rental Property Funding Question: HELOC to finance your investing

[Rahsheen Slaughter]

Hey, Bigger Pocket peeps, is it risky to use a HELOC to finance purchasing an investment property and refinancing to pay back the HELOC? Are there any CONS I should watch out for? I have a fair amount of equity in my personal residence, and I would like to purchase a property within the next 30 days. I closed my first rental property in November using a conventional loan. The goal would be to BRRRR my next investment using the HELOC. I have a low-interest rate on my home and don't want to cash out and increase my rate to the current rates. Any suggestion? I really appreciate any help you can provide.

[Andrew Garcia]

Hi @Rahsheen Slaughter, there are a couple of risks to watch out for.

1. Rates rising. The rates rising will cause your HELOC payments to increase since HELOCs are ARMs. Additionally, the refinance rate will be higher than the rate to purchase upfront. You could continue holding the HELOC and paying the IO payment until rates drop again but if you want to free up your HELOC to purchase other properties or use it for other purposes, you cannot.

2. Property value deflation. If the property value decreases from the time you purchase to the time you were planning to refinance, you may not get enough equity from the refinance to pay off the HELOC.

3. No principal buydown. Most HELOCs are interest-only so there will be no principal buydown from the time you purchase to the time you refi.

4. Higher monthly payments. Since you are borrowing cash to purchase a home, you will need to pay a certain amount per month for the IO payments on top of hard money, renovations, utilities, etc.

With that being utilizing HELOCs will allow you to grow your rental portfolio much quicker so it can be a great strategy as long as you account for the above risks.

Hope this helps! Let me know if I can be of any assistance.