Heloc as a down payment ??

Question

Huge bigger pockets listener and fan here !! First time poster!

I wanted to run something by everyone to get your opinion. I currently have 1 investment property - Mortage is 580, renting for 1200- super happy with this one.

Now I’m stuck in the saving phase for my next opportunity.. however I am in the process of getting a HELOC on my primary.. I can pull out about 50K.

A little background on myself - I’m a 1099 employee, wife is W2. We make average money but not enough to save for the next investment ( it would take a long time) .

As a person, I’m a very nervous person-  the thing holding me back on the heloc is the debt/payment it will bring

My plan with the heloc would be to use it for 2-3 down payments for more opportunities . I live in NE Ohio where things are a good price (60K-120K for good 3 Br houses)

Would you continue to save and just play the slow game , or would you recommend pulling the trigger on the heloc ? Would you recommend something different in general ? Using the heloc differently ?

Andrew Postell · Answer

@Aaron Mostoller so I'm going to ask the obvious here if you don't mind - this is the BRRRR forum, so why aren't you considering doing the BRRRR method?

Aaron Mostoller · Answer

@Remington Lyman I couldn’t house hack just bc of my current family situation unfortunately

Eliott Elias · Answer

It will scare you until you do it. Make sure you are solid with your numbers, you save enough money to where if there is vacancy you can stay afloat. Have a plan to pay the HELOC in full in 2 years. Slow is good, but you want to bit on opportunity when you see it.

Marc Dube · Answer

I would tell you this...dont take the heloc out unless you can make sure that the profit you get from the new home is more than enough to cover your heloc payment. As a mortgage loan officer i see this quite often and the biggest issue is that people take out helocs and use it for OTHER things, instead of making money with it. Remember that rates right now are not great and the heloc is adjustable, so you rate will fluctuate and most likely go up and not down for some time. Consider doing a fixed rate and fixed term equity loan out instead, then you know what the monthly payment will be and not get caught with your pants down when rates continue to rise. also think about the fact that helocs will have an amortized payment of only 15 years, which will make the monthly payment higher than a fixed rate 2nd. You can do interest-only on most helocs, but just run your numbers first

Steve Bugnacki · Answer

I am trying to figure out the costs of the following.  I have my primary where we have lived for 20 years and could sell it and get the tax free earnings from the appreciation because it is my primary (no need for a 1031 exchange on the sale of a primary as I understand it).  I would however, like the option of renting my existing primary and buying a new primary to live in for a couple years which would give me the option of moving back to my original primary if we don't like where we move.  I am trying to quantify from a tax perspective what exactly I am sacrificing if I rent my existing primary and sell it after a year or two rather than just selling it now.  Also what have I cost myself tax wise if I then move back into my existing orimary andbluve there for another "x" number of years and then sell.  Is there a point where I regain the (250K max) tax free earnings on the sale of my existing primary?  If I move to a new primary for 2 years and then sell my original primary do I sacrifice all the tax free earnings on the appreciation of my original primary even though I will have lived there for 2 out of the previous 5 years?

Jon Puente · Answer

Hey Steve,

The most common way to avoid taxes is using a 1031 Exchange and purchase a property shortly thereafter selling a rental.  I have no plans on selling on my "old" primary because I like buy and hold real estate.  But if I ever did sell, I would use a 1031 Exchange.

Aaron Mostoller · Answer

@Andrew Postell it is in consideration !! The heloc still being used as the DP

Steve Bugnacki · Answer

Tax question.  If you rent your existing primary, walk me through the numbers of what that costs you when you want to sell that primary down the road since you now sacrifice the benefit of 100 percent tax free gain on that primary (up to 250K) since it now will be a rental.

Dave E. · Answer

@Aaron Mostoller this question gets asked all the time. The only thing that matters really is if the numbers work as you are essentially financing 100% of the deal. Part with your heloc and part with a traditional loan. If the numbers work, then great. But in my experience it has to be a great deal. 100% financing is a tough obstacle to overcome especially with today’s interest rates.

Rick Albert · Answer

I've used two HELOCs now. Got it on my first house hack and used it as a down payment for my second house hack. Then did it on my current house hack and bought property out of state.

What I love about HELOCs is you only pay interest on the money used. Now, lenders aren't a fan of you using HELOCs, so you may need to take it out and just leave it in the bank for two months for seasoning (confirm with a loan officer).

The reality is, if the numbers work the numbers work. It wouldn't be a bad idea to use it towards a new house hack assuming your current one would cash flow something acceptable to you.

Heloc as a down payment ??

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