Todays topic for this Newbie who’s soaking in all the info possible before taking the plunge: Home Equity Line of Credit
I’m considering going ahead and setting up a HELOC with my primary residence so that I’ll have funds readily available as needed. I’m considering using it to make intial purchases and for rehabbing, then I’d refinance with a convential loan should I keep the property to rent. I could have enough for a few SFH deals at a time if needed.
Any downside to this that I haven’t considered?
Also, if I have money pulled out of the HELOC for more than one home at a time, do I have to figure out and allocate the interest for each particular property (for record keeping and tax purposes). Seems like it could get a little muddy.
Would the interest from a HELOC be expensed out on the Schedule E when figuring my Rental Property Income or would it be deducted on the personal side with my Schedule A when I itemize? Any net difference between the two?
Obviously there are different thoughts on using HELOC for doing deals. I understand both sides, and I personally used mine to do my first deal and it worked out fine. What it comes down to is what you are willing to risk. You can always go to a hard money lender and you will pay more, but you won’t have so much at risk. The other benefit of using a hard money lender is you get another opinion on the deal you are buying. If you can’t find a hard money lender to fund your deal, it’ll be a good indication you better get out.
It’s my personal belief that anyone with access to HELOC funds should absolutely consider the resource for property investment. Even if HELOC funds are a second or third level choice, having the option open could prove invaluable. Many who have been investing in real estate for any length of time would probably agree that cash flows tend to fluctuate from time to time and having reserves set aside would be wise.
Allocating interest falls into two catagories. The first, as a tax deduction. The second, as a part of the total acquisition cost of the property. The tax deduction would exist for the primary residence. Your CPA can best advise you on the accounting. It should be easy to account for the interest for each property by looking at specific journal (checkbook) entries for the HELOC. My HELOC has a variable rate, but I’m not going to lose any sleep if I don’t account for $2.75 of interest.
Finally, in case nothing I’ve said makes any sense, employing an investment strategy like the one you’ve described is tried and true. Go for it!
A homestead is protected from such risks. Creditors cannot take your home, but if you setup HELOC, the bank can put you on the street since you put your house on the line. Not everyone that ventures into business risks their home by going into business.
Besides, I never said setup an LLC or borrow under your own name. I said look at more creative alternatives. hard money lending, owner financing with no recourse, subject 2, lease options, …etc.
For my first deal, I’ve assumed that I’ll have to use more personal funds/personal financing. Seems like the most simple option. My thinking is that once I’ve established some equity on the investment side of things, I can then draw on that instead.
I understand that by using a HELOC from my primary residence that my home will indeed be the collateral for the debt. However, I will not be going into a deal that I do not feel completely comfortable with, and the funds will only be drawn from the HELOC for a couple of months until after the rehab and I refinance. Also, I will not go into debt for an amount that I am not able to pay for with my disposable income. Call it a learning curve cushion.
I would like to get to the point where my property investments can be completely ran like a business and kept separate from my personal finances. At this point, to get the ball rolling, a HELOC just seems to be the easiet way. Once I have equity established in an investment property, I would then like to use it to set-up a HELOC for quick access when funds are needed and could then keep my personal finances and home separate.
Sounds like you should be all set for using a HELOC. One of the cheapest ways to get money aside from a primary. Most don’t have fees or minimal fees. Depending on how much you need, you could also consider floating it on a credit card. There’s still some 0% deals floating around out there although you credit might take a hit if you max it out too much.
As for HML, I see too many people on this forum talk about them as a first line. HML should always be the last resort. Lots of people talk about using them, but we hear very little from people who used them and made a lot of money. They can be good in the right situation, but their fees and high rates can eat up any profit.
I applied online for a 100k HELOC this afternon. 30 seconds after I clicked “submit”, I was being congratulated for being approved! No application fees or closing costs and no annual fees. Just a nice line of credit waiting so that I’ll be able to move quickly on the right deal when it comes along.