All Forum Posts by: Spencer Cornelia

@Spencer Harvey HELOC's should only be used on properties where you are rehabbing so that you can get your money back in a short time frame via the sell or refinance.

Your strategy likely won't even work because I can't imagine a bank lending to someone using a HELOC as the down payment. Your strategy is to be 100% leveraged on an investment property after properties have surged in value for 10 years.

What will go wrong? I don't know. And that's the problem. You don't know either. What happens if lending constricts and they call your HELOC due? It's happened before. If it happens again, you will have to fire sale everything or face foreclosure. That's just one semi-unlikely path. But there are others. And all it takes is one unfortunate event and you could lose everything

My point is that using borrowed funds to then be 100% leveraged on a property is playing with fire. I've heard many stories about people using this strategy in 2006. Keep refinancing and taking out HELOC's to buy investment properties because what could go wrong? They found out the hard way.

@Andrew Barrios 
"The idea is for us to use aHELOC to fund the down payment(s) and use a traditional mortgage for the remaining balance. We would funnel the extra cash-flow into the principal and repeat the process to buy additional properties."

Unless I'm misinterpreting what you're doing, this is being 100% financed on a retail property.  If you're buying these properties way under market value and can refi within 12-24 months after some rehab/value-add, then it's a sound strategy.  But this is exactly what happened to a lot of people in 2006.  Use 100% leveraging because what can go wrong?

What happens when some big expense happens in life outside of real estate?  Car wreck?  Health issues with a family member?  $10k damage from a lightning storm?  Your main income source goes to $0 completely unexpectedly?  Literally anything could wipe you out.

Using a HELOC for a down payment creates a house of cards.

@Chase Romine I would highly recommend walking the property with the inspector.  He will look at every component of the property and let you know exactly what is wrong with anything they see.

Their purpose is to protect the lender.  The inspector's job is to find anything that could cause concern for the buyer so being able to hear his opinion on everything will help you understand what you're buying and what kind of expenses you may be facing after you purchase.

@Bryan Faust You will not be on the mortgage. What I'm concerned with is your friend not having 3.5% for the down payment. If that's the case, then your money will be seen as a gift. And gift's for FHA loans are only allowed from family members. So this scenario would not be allowed.

@Andre Walker I'd stay away from condo's. Especially if you're thinking of doing AirBnB. Way too much can happen in the next couple of years and your strategy has to shift. The HOA's may have no restriction now, but there is a greater than 0% chance that they could change those rules tomorrow. I, personally, would not be comfortable with that.

Are there any properties that would allow you to house hack and do AirBnB?  I'm thinking of a multi family unit, a house with a converted garage where you can close off access to the main house, houses with a casita, etc.?

@Andrew Barrios using HELOC's as a down payment is a great strategy on paper, but it provides way more risk than many people realize.

HELOC's are perfect for deals where rehab is involved and a sale or refinance is expected in <6 months. You don't want a credit line fully utilized when an unexpected event happens that puts you in a financial bind. Every investor, including you and me, think we have all of our risk mitigators in place. But life is tricky and can throw you just the right curveball when you can least afford to have it happen.

You're also looking into a strategy where you will be 100% leveraged on a retail property at what could be the peak of the market.  Not exactly sound investing principles.

IMO, your goal should be to use the HELOC to bid low as a cash offer on one of these houses until the owner accepts your offer. Use HELOC for purchase and rehab, then refinance so your HELOC will be paid off and you'll have your single family rental.

@Bryan Faust You would have 50% ownership of an LLC that owns nothing. That makes no sense to me. Their name would be on the mortgage, not the LLC.

@Clarence Harris I was in your shoes a year ago.  Now that I have two flips and a few properties that have required work under my belt, I've become a lot more comfortable with the rehab prices.

What you're trying to do is completely skip the learning stage of this business.  While we all want to do it, unfortunately, there is no easy way.  You really only learn when you have something to lose.

What I'd recommend is walking your potential flips with a contractor and asking questions.  Most will have a "per sq ft" type number for labor and then you can do your own research on materials cost.  Most materials cost is minimal as the real cost comes from labor (just like going to an auto shop).

At some point, you're just going to have to take on a rehab and learn while doing. If this isn't comforting to you, then find someone locally who's done a few rehabs that will give you an honest opinion on a general number of what the rehab should cost. Make sure you're all-in is about 70-75% of the ARV and then buy!

@Bryan Faust You can't use an LLC for an FHA loan. It sounds like what you're in need of is a promissory note and contract to cover the agreement between you two. I've never done this personally, but I'd imagine you'd have a signed agreement stating the exact terms of the situation. And then you'd have a promissory note to cover your financial obligation to him, since he'll have the mortgage in his name.

What is the benefit of doing this?  This sounds like way too much effort for a weird agreement.

If you're low on cash and can't get a property yourself, then look for creative financing options with property owners.  Here's how I landed my first investment property when low on cash: 

https://www.biggerpockets.com/forums/223/topics/646426-how-i-bought-a-seller-financed-4plex-in-las-vegas-part-3

@Chris Fischesser I'm not local but I'm up there a few times a year as I am an out-of-state investor and need to check on properties.

I'm jealous of everyone on BP who lives in Cincinnati as I think it's easily one of the best markets to be in as the competition is low, profits are high, large population, good employment, numerous schools, etc.