Thoughts around utilizing HELOC as down payment for hard money loan to BRRRR/flip. I understand i will have to show reserves for the hard money. Looking for advice from people that have executed this strategy.
@Mario Richardson That is a high leverage strategy. One of the risks with a high leverage strategy is the the bank, CC, HELOC provider, can freeze credit lines whenever they decide to. I was about 2/3rds of the way through a flip when a CC company decided I was too leveraged and froze my CC. I had used almost all of my liquid reserves to pay the DP for the HDL and had planned to pay my GC (my brother) as I went using CC's as needed. Since I had ~$75k in available credit I had calculated, correctly, that I could stay solvent until the rehab was done and I had sold the house.
I found out quickly that credit lines can be frozen at will. When I was bleeding $$ during the rehab phase it made me look like I was about to financially crash, which wasn't accurate, but I can see why the banks suddenly became worried. Going from ~5% credit utilization to ~50% in a couple of months was enough to freak the banks out. Even when I discussed with them why, how, and when I would be able to pay them off, not just continue making payments, they still told me they are closed for business. (I had made at least the minimum payment and usually substantially more than minimum)
Fortunately my GC (brother) was a partner in the flip and was willing to forego payment until the house sold. This really set us back though, because he was no longer able to focus solely on this project until it was done, as he still had to make enough $$ from other work to keep himself afloat.
That's a long winded way to say: Make sure you have enough cash on hand to finish any project that you are heavily leverage on. Stress test and plan for the worst. It may be worth pulling enough off the HELOC, if possible, to have the $$ to hold until sale/refi.
That's a great strategy, I've seen investors use this to purchase their flip or turnkey property. You can grow your portfolio quick. Just make sure you're doing your DD.