Approved HELOC.... Now What?

Question

BP Team -

My Wife and I are new to the RE investing market and have been doing our research, reading articles, analyzing deals, etc. Figured there would be great success stories and the unfortunate fails  that we could learn from within this community, so we appreciate any insight and feedback.  Long story short, we have our primary home and tapped into the equity through a HELOC... Figured we might as well put the equity to work.   Out initial thoughts are to buy properties for long term rentals and potentially short terms (Air BNB's), I am not looking to flip at the moment, looking to start a long term passive income.

After reading a few articles/threads, It seems like the idea is to find a good deal and then use the HELOC for the DP of 20-25% and then update a few items (if needed) to force appreciation and then cash out refi and pay off the original HELOC on our primary.... then rinse and repeat.   Does anyone ever just pay in full for a rent ready with their HELOC and then mortgage the rental property with a cash out refi and pay off the original HELOC depending on appraisal?   Maybe people pay in full as a negotiation tactic on a deal they find to lower the purchase price. (Maybe not in this current market)....

I know there are a good amount of variables that go into every forum thread/post, but would love some feedback or give insight on success stories they had using a HELOC.

Thanks and looking forward to the dialog!

Chad

Dave Skow · Answer

I think most  investors  will  use the  minimal  amount  off their heloc   assuming they can  obtain  traditional  financing for the   remainder  needed  ...this way  they  keep  the heloc  available  balance as  high as  possible  and   also  minimize the  debt   cost on the new  home

Hoi L. · Answer

When I took out a HELOC from my primary residence, I used it to buy a property (with extra cash added) with 100% cash to obtain the sale (no mortgage/financing worries for the seller), beat out an offer that was 5% higher, before refinancing the rental property at 80% LTV with 30 yr fixed mortgage.  I then used the refinancing cash to buy 2 more rental properties.  Leverage was key in my acquisition phase of REI for us.  However, now with rates skyrocketing, numbers don't work as wellanymore as far as +cash flow.  When we started out this REI journey, our #1 rule is to ensure long term +cash flow stability (even if <$100/mo per door) in case we lose our jobs but the rent will always cover for the mortgages/tax/insurance.

Chad Hutchens · Answer

@Dave Skow Thank you for the message and industry insight.  To your point, Do you typically see majority of investors use HELOC's as their 25% DP or if the full property value can be covered they pay in full instead?  Do you see more pros vs. cons over a certain route?

Dave Skow · Answer

@Chad Hutchens- every  situation will be  different  - the scenario you outline isnt viable  as  1)  the property value a great  deal to  be able to  do a  full refinance  2) the new interest rates  will likely be much higher 3) a  lender  refinancing a 1st mtg and a " non  purchase  heloc "  will  classify this as a cash out  refinance and there are much lower LTV  guidelines for these  .........I think most   investors that  use helocs  try to keep the  HELOCS  in place ...pay them  down  as much as possible so they can  be re- utlized  in the  future ....if the  full property  value can  be covered by the heloc - your  idea is  valid  but be aware when doing a  cash out  refinance on a recent  acquired rental ; 1) the lender  will use the lower of   acq  value or the  appraised  value and  2)  you  will be lucky if you can get a  ltv of  75%  on a  rental cash out loan

Approved HELOC.... Now What?

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