Originally posted by @James Maradits:
Originally posted by @Account Closed:
@James Maradits In the event the underlying asset tanks, a HELOC that I haven't drawn on gets reduced. A HELOC that I have drawn fully out only allowed me to pay additional interest (more than a traditional refi) on money that was sitting in reserves during the draw period. This does nothing to protect my downside risk in the event values were to take a massive hit. Nobody draws out $80k on a HELOC to let it sit on the sidelines at 4.5% interest unless they are nuts.
As @Matthew Olszak suggested....if I were to rent to a family member for 6 months and then sell it to said family member I get all the downside protection with a fraction of the skin in the game. If my family member were to purchase the house from me with 3.5% down and the asset values crash 6 months later I'm sitting on $120k in cash. My family member gets a FHA loan at ideal interest rates, a new basis for depreciation, and after one year he could take me on as a tenant paying our way out of the crash. Everyone wins.
A HELOC is the convenient answer...and in my opinion... the wrong one to limit downside risk.
I think your logic is flawed here. Why would you want to be over leveraged if there is a major market event that drastically decreases the value of the property? I understand wanting to have liquidity in the event of a market crash to potentially buy more deals, but doing so at the cost of putting yourself into a massive negative equity situation seems bizarre.
Your other plan to "limit downside risk" is to cash out by selling to a family member at what you're expecting to be the height of the market and then sticking said family member with a property that they are underwater in debt with? I'd consider that highly unethical on top of walking the line of mortgage fraud.
With a HELOC, they aren't going to actively re-appraise your property and change your available credit limit before the term is over. There is a chance that if there is a major credit market crash they may freeze your ability to draw from the line, but I don't suspect the loan would be called due unless you were in poor standing.
Where did you get "over leveraged?" We are talking about ONE house that I own, not my entire portfolio.
Where did you "height of the market"? I am talking about selling now because I'm in a position to strip equity. I'm not trying to time the market.
Where did you get "sticking said family member" when I mentioned renting the place back from said family member, giving them all the tax benefits of depreciation, and a rock solid tenant in myself with $120k in cash to pull through the downturn.
Where did you get "unethical" or "fraud" when I mentioned selling a property I own to someone I know, having them occupy for a year under the terms of the FHA loan legally, and then renting it back from them.
If you're going to argue with me at least do me the courtesy of not putting words in my mouth. I posed this question and got several considerate answers that actually posed viable solutions. You're over here arguing with me about WHY I WANT CASH IN A DOWNTURN. Because...business sense...that's why. For crying out loud.
PS....a freeze on a HELOC is effectively a reduction. You can't draw against the full LOC. Call it whatever you want. Check out the response from Dereck Dombeck on this thread if you're still convinced that banks won't call your "loans". A line of credit is not a loan, so were are clear.
https://www.biggerpockets.com/...
