Home Equity Line Rental Strategy

Rehabbing, Fix and Flip, Rental Properties
1

Here’s my plan/strategy/technique. Whatever you wanna call it. :smile

  1. I will use my home equity line to buy and repair a single family home
    to be used as a rental.
  2. As quickly as possible, I will do a cash out refi and pay off the equity
    line.
  3. This is the good part. I will find the next property and
    do it Over and Over and Over again! :bobble

This seems like a no brainer to me and easy, almost too easy. It makes me think of the old saying “if it sounds too good to be true, it probably is”. Do you see any potential problems or flaws with this?
Really the only flaw I’ve found is only being able to buy one house at a time with the equity line. If I find another while my equity line is already in use, I would have to figure out another way to buy the new property.

A few details:

  1. The price range I’m investing in is $20,000- $60,000.
  2. Credit and dti/ratios are fine.
  3. Properties will have to be in my wife and my name to avoid doing stated loan with higher rate. (She’s the bread winner on paper)
  4. I have a lender who doesn’t require property seasoning on the cash out. I’ve been told that most lenders are now requiring at least 90 days seasoning so you may want to check with your lender if you’ve been doing this or plan on it.
  5. I don’t have to worry about the Fannie/Freddie rule regarding 10 properties yet. That is a problem I look forward to. :cool
  6. I can and have found properties that pass the 50% rule of thumb and cash flow nicely.
  7. I have my real estate license so I will receive the buyer’s agent commission.
  8. Our real estate company has a mortgage brokerage that won’t charge me an origination or yield spread premium or any other junk fees so I save on the refi.
  9. I definately suffer from paralysis of analysis. :huh

Benefits of this technique

  1. You’re able to pay cash for the properties which gives you a better chance of your offer being accepted and a quicker close.
  2. You don’t have to do a renovation/repair loan. I am pretty sure these have higher closing costs and interest rates.
  3. When you do the cash out refi, you’re able to do a 30 year fixed conventional loan with a pretty good interest rate.
  4. When you cashout, you can get a few thousand extra out to have on hand just in case an unexpected expense occurs.

That is what I have thought of and I think it is all accurate.
I hope you will elaborate on this strategy.
Have you used it with success?
Any additional benefits to this technique?
Anything to make this better?
Any additional problems one may run into?

Thanks in advance and good luck to you! :dance2

2

Alot of rehabbers I work with take this approach and there are a couple of “gotchas” taking this road:

  • Your DTI & subsequently your credit scores could be impacted (the credit bureaus treat/view HEL/HELOCs like big credit cards—once you borrow more then 35% of available credit, your FICOs will be impacted).
  • Rates are variable & could creep up depending on how long your holding period is.
  • HEL/HELOCs are reported to the bureaus and could have an impact on your ability refinance.

Good luck and hope this helps.

Regards,

Scott Miller

3

I’m not an expert on this and maybe I’ve listened to Dave Ramsey too long, but this sounds like a great way to get really deep in debt.

It could work out grand as long as the winds are blowing in the right direction, but if the local economy fails/you can’t get renters or sell you will be left with a lot of bills and not enough income.

I’d love to hear stories from people on the board who’ve tried this for good or bad.