As a newer BRRRR / Buy-and-Hold investor, I went shopping for HELOCs recently and would like to share some insights gained from this recent experience for other people obtaining their first HELOC. Hopefully, this documented experience helps someone looking to do the same.
[Background:]
My partner and I decided to position ourselves to go shopping, ahead of the fall, no pun intended. However, we can also decide not to use it or use it in other creative ways to make income other than a direct down payment for our next unit.
Credit Score at Application Time: 739
[Our HELOC Goal:]
Obtain a HELOC for investing into another property as a down payment.
At minimal, we will block off funds in the HELOC for one major repair, setting up property management, and 90-days of vacancy for my current unit which will become a rental right after moving.
Each one of our properties will have this type of liquid financial buffer dedicated to it and untouched, though not always in a HELOC.
Leave as much room in the HELOC balance as possible to minimize credit impact, pay for an eviction, unexpected expenses, and maximize our ability to move fast on great investing opportunities.
Buy the new property where I will be moving into, using minimal down + closing costs, if any. This depends on how creative I ultimately finance obtaining the new property. Depends on the deal and property.
All cashflow obtained from the rental income will be repaying the HELOC first to make it available again for further investing opportunities.
[Our Preferred Terms:]
$0 initial draw, fixed-rate, longest draw period, longest term length (prioritize flexibility)
[Bank or Credit Union?]
Local lending supports local members over shareholders. Lower rates, fees, faster decision making with local market conditions in mind, faster overall with less hesitation than perhaps slower or reducing markets.
While banks still had great options, I felt many of them had more restrictions on terms, e.g., Shorter draw periods, shorter term lengths, sometimes high initial draw requirements as well.
The key thing is keeping our search local worked very well when it came to the institutions being more generous with rates and terms.
[Results:]
We called 4 credit unions and chose to work with Desert Financial CU as they had the best product that fit our strategy and needs from the four places that we called.
We obtained a HELOC with 80% LTV, 20-year term, 10-year draw period, 3.73% intro rate for 12 months, after that it is fixed @ 5.85%, $50 annual fee, no application fee, $0 min. draw, $25 deposit to open the savings account and become members with new lender connects
This HELOC product is approved for any use, specifically stating that it can be used to obtain more property. We have a debit card, checks, and a savings account as part of the product. You transfer from the savings to the checking when it is needed for use.
We could go higher on LTV if desired with certain conditions, but we don't really need the extra amount and speeding up processing time was more useful to our goal versus a little more currency.
[Insights:]
All of the institutions we called have 4-6 weeks of processing time due to a lack of staff and a high volume of applications.
Some institutions calculated DTI differently than others and some may try to pull a fast one on you. Make sure you understand the product, what you need, why, and are choosing a good option.
Some require proof of income and some do not. We found that if we asked for around $80K-$100K, all income proof was necessary, but for less than $80K, credit-reported income was good enough, skipping the bank statements and contracts for other self-employment or small business income.
Some use “desktop” market value estimations and some require an appraisal, but all of them give you the option for a fresh appraisal if you would like one.
Unsurprisingly, all of the credit unions will try to get you to open an account and upsell you on other financial products throughout the process. For some, opening an account is required for the HELOC and may even be the difference between getting you from a variable to a fixed-rate option.
Others try to get you to open an account before you even have the approval of anything – real slimy like, we won’t say any names on that.
[Lender Experiences:]
AlaskaFCU – AlaskaFCU did have great support people and it felt like they had a clean ship over there as far as transparency, the process, and willingness to assist. The terms were just not as preferable to others.
OneAZ – Both people we spoke to over there sounded dead inside and they wanted you to come in at 45% or less back-end DTI, AFTER the HELOC.. They tried to crunch the numbers to minimize the amount they will lend while also passing us around to different people on the phone. Overall, it felt like a car dealership in my ear without the luxury popcorn. Hard pass. This company is okay and may still work if you have significant equity, but their HELOC terms and processing staff were not suiting our needs.
Credit Union West –Much like Alaska, they also had a clean process, staff, and system. The terms were simply not as preferable to others.
Desert Financial CU – The best of the HELOC lenders we called with very acceptable terms, staff, and processing.
If you found value in this post, please let me know. Many times, we have specific questions, but until you actually perform the action, there will always be missing information.
I am trying to detail our thoughts as newer investors and hope our experience helps someone pick up that phone and take action to move forward.
Feedback regarding creative financing options, things to consider for the future, as well things we should have done but messed up as noobs is more than welcome.
