Using a Heloc to BRRRR first long term rental question

[Anna Sarvis]

My parents are interested in buying a property in their neighborhood using a HELOC to buy it for cash. We are brand new to real estate investing and are not sure how to go about this deal. The property is listed for $259,900 and needs new floors and updating to the kitchen and bathrooms. Their current house that they live in is fully paid off and has been for many years and is worth around $350,000. Can someone explain how using the Heloc to purchase the property with cash, then rehabbing it, then renting it out and then refinancing the home would benefit them in this scenario? They like the idea of owning this property as a rental and then eventually having it for a family member to retire in since it is one story and in eye shot of their current home.

I just don't understand how a cash out refinance works and what the benefits would be for it as opposed to simply purchasing the home and renting it out without doing the reno and refinance part of it.

Would love any advice or clarification here!  

[Denis Ponder]

I would echo what Janet is saying. I would explore hard money or bridge loans and maybe use the HELOC to fund a downpayment or something. Use someone else's money when you can and keep your own money available for emergency situations. In your proposed situation, here is what I would do:

1) Make sure you have a good/solid/reliable contractor that can actually do the work and has capacity to handle the project.

2) Apply for the max HELOC and get it established. Other than closing costs and loan fees, they are free to have. Then you have the full amount available to you, ONLY IF YOU NEED IT.

3) Secure funding for the property using someone else's money. Hard money, private lender, bridge loans, etc. Use the HELOC for down payment and closing costs, if needed. You will also have the rest of the HELOC available to you if things don't go according to plan. But, that will add to your holding costs so make sure you are in a position to support the payments in the interim.

4) Purchase the property

5) Fix the property

6) Rent the property

7) Refi the property (Private, DSCR, Conventional, etc)