@Travis Gainey - Great questions! Unfortunately, like with so many investment questions they both have the classic annoying answer of, "that depends."
Should you use a HELOC on a BRRRR? I have clients and agents on my team who are actively flipping property on and off a HELOC to build their portfolio. There is risk to this method one of which you identified, "what if I can't get a lender or the appraisal is low?"
- Make sure you are confident in your renovation budget.
- Make sure you are factoring all your holding costs, and the fees associated with debt.
- If you have bandwidth to do some of the work yourself, then I would be ready to lean into a project on nights and weekends to be sure that it stays financially on track. If you cannot act as your own safety net, then you absolutely need to pad the safety net you use in your budget.
- Be an expert on your market. You cannot control the market, but you should have a very good idea of the value of your home after it is repaired.
- Make sure you know your market rent for your home. The appraiser is going to be the one to determine the market rent. If you have a long term lease singed then some banks will accept that lease and over ride what the appraisal report says.
- There is a balance between being so conservative that you never get a deal, and protecting yourself from things with a high likelihood of happening. For example, I would recommend underwriting a property assuming a rate increase over a decrease.
- Talk to local lenders before you put in any offers. Give them the scenario and get a really good understanding of what kind of requirements they will have in order to give you debt and get a property off of your HELOC. You need to be solid on your understanding of loan to value and debt service income ratios. Those paired with your appraisal and your rent rate will be what you look at before purchasing a property to ensure you can get 100% of the HELOC paid off with the loan.
There are absolutely a lot of factors with this approach, and this approach has more risk than other options, but as I said, I have several clients that are leveraging their HELOC successfully.
Best of luck on your learning and investing journey. Keep us posted along the way! Your profile puts you in Concord ... If you ever venture east towards Raleigh feel free to hit me up and we can grab a coffee.
