Using HELOC/HEL for some or all of purchase
Currently in Nashville, TN, with a primary residence and a SFH rental with strong cash flow. Currently looking to add another rental property. We have flirted with the idea of section 8 tenants, but are leaning towards a more traditional long term rental plan. Being in Nashville, we are very open to looking in other up and coming markets. On our rental property we have about $100k-$120k in equity and we are planning on leveraging that for the next property. In some markets this could purchase a property outright and others we could cover 50%. We would like to be able to continue the pattern of leveraging equity and OPM in to the next property. Any advice on the pros and cons of using the HELOC/HEL and purchasing outright or only using for a large down payment?
#3 Starting Out Contributor
- Lender
- Austin, TX
I would only explore second-lien positions loans if your current interest rate is in the 3's. If it is a recent mortgage, then it may make more sense to do a cash-out refinance. I would also only use that money for the down payment on another deal, not buying it all in cash. Most of the time, deals pencil better with a regular DSCR loan for an acquisition than with a high-interest rate ARM on your primary.
This is a question I have as we narrow down our search for a sfh. You mentioned not paying all cash for the house. We have enough for 25% down on a property. Or we could take the money from that 5% and buy down interest rate.
Matt, that's not a bad idea to get you into another property or maybe a couple. I know of some options where you can go to non-traditional lenders and use a DSCR (debt service coverage ratio) loans and you may be able to leverage that money and not have to rely on your credit to get approved.
Hey Matt,
I aggressively built a 12-door rental portfolio from 2019-2021, largely leveraging my HELOC.
I always tell people that it's a fantastic tool as long as:
- You can COMFORTABLY service the extra debt
- You have a plan to pay it off
I was ok with the extra debt servicing and my payoff plan was simply finding off-market deals, paying cash, doing cosmetic rehabs, and refinancing when done. Yes, the BRRRR method.
It allowed me to leave much less in each deal had I bought them with 25% down. Then, what was left on my HELOC was able to be paid down with cash flow as I took my foot off the accelerator.
Hope that helps!
Quote from @Matt Norris:
Currently in Nashville, TN, with a primary residence and a SFH rental with strong cash flow. Currently looking to add another rental property. We have flirted with the idea of section 8 tenants, but are leaning towards a more traditional long term rental plan. Being in Nashville, we are very open to looking in other up and coming markets. On our rental property we have about $100k-$120k in equity and we are planning on leveraging that for the next property. In some markets this could purchase a property outright and others we could cover 50%. We would like to be able to continue the pattern of leveraging equity and OPM in to the next property. Any advice on the pros and cons of using the HELOC/HEL and purchasing outright or only using for a large down payment?
I sort of did this strategy over the past few years but have a tough time making sense of it right now.
My HELOC used to be in the 2s and 3s, now it's at 8.5%. I can't really do much with it now. Prices are high, rates are high.
There is risk involved with leverage and you should only take out how much you know you can cover.
In my situation, I always look at my heloc as temporary financing until I can get a long term solution. So, I use it to close cash in a few days and then refinance the property, or fix and flip it. I wouldn't keep heloc financing long term.
My biggest advice to myself 5 years ago was to not over leverage. Both for the sake of stress and well being of my overall financial plan.
If you do cash out refinance it would allow to only get to 75% LTV around the high 7s with some points, they would still require to be 1st position. As for HELOC allows it be in 2nd position and it allows you to get up to 90% ltv for primary. However, rate would be prime + index + an additional +2% for the shock factor just to qualify, but you can draw the funds whenever you want vs cash out where you have to draw all the money after closing.
The question is what are you trying to use these funds? What's your main objective that you are trying to achieve?