Full purchase through HELOC

[therealpotentials]

I have a HELOC application which my bank`s mortgage specialist says I was approved of. I am still waiting for the money to be on my account. The amount is a sizeable amount that could enable me to buy one property in full...would not require me to get any financing.

With this in mind, I could probably have a big cashflow on that investment having no monthly mortgage to pay. And possibly sell that property when the price has appreciated and purchase a bigger investment. Should I or shouldn`t I do it?

 

[SamEfford]

I would use that money to buy multiple properties. That is one of key lessons I teach JV partners. Smaller down payment on multiple properties equals higer ROI.

 

[markbrad]

I see a couple of options here. Do what you say and pay all cash on one property. Then a little down the road, get a HELOC on the rental and pull a majority of your equity out and make another purchase and repeat. This allows you interest only payments. I would suggest checking with your mortgage specialist on this. I have a rental where I took out 80% in a HELOC through ATB. Not sure what other lenders will do this.

OR you could arrange your HELOC as you already seem to be doing, and then only draw enough to make the downpayment on a revenue property and finance the rest through a mortgage. Then perhaps you could do this a few times over, and only draw on your HELOC the amount of each downpayment at each time. You will need to weigh out what will generate better wealth for you over the long term. One property with really good cash flow and appreciation that is limited to one property, or several properties with little cashflow, but appreciation on several. If you do the math, I think you will find that it is the appreciation on several that is going to create long term wealth, not just great cashflow on one property with a little appreciation on the side!

Mark

 

[Thomas Beyer]

QUOTE (therealpotentials @ Apr 5 2008, 04:18 PM)
I have a HELOC application which my bank's mortgage specialist says I was approved of. I am still waiting for the money to be on my account. The amount is a sizeable amount that could enable me to buy one property in full...would not require me to get any financing.



With this in mind, I could probably have a big cashflow on that investment having no monthly mortgage to pay. And possibly sell that property when the price has appreciated and purchase a bigger investment. Should I or shouldn't I do it?




first of all an HELOC is not money in the bank ! It is a right to draw, or an "overdraft facility" secured by an existing piece of real estate.



You have to pay interest only on the portion you use, which is good. So don't use it all immediately to buy a yacht or a fancy condo in Hawaii. Research the market, decide what AREA of the world you wish to invest in and then what type of property.



This is a big world, so is it Lower Mainland, Edmonton and area, S-Alberta, rural SK east of Saskatoon, Northern Manitoba, Florida, Phoenix, Vietnam, Singapore, Venice, Turkey, ... ?



Any area takes time (and a little bit of money for driving time, flying there, donuts, lunches, research material ..) to research. The bigger the area the bigger the time commitment .. BC takes more time to research than Lower Mainland which takes more time than Greater Vancouver which takes more time than North Shore which takes more time than West Van north of Hwy 1.



I suggest you start with a VERY VERY small area .. say a suburb of one of the Top 10 REIN towns in BC, AB or ON.



Then, decide on a TYPE of property: townhouses ? condos with oceanview ? single family homes older than 50 years ? new sub-divisions ? pre-sales ? acreages ? horsefarms ? trailer parks ? office buildings in crappy parts of town ? high end luxury condos with high end finishings ? land with sub-division potential ? strip malls ? defunct shopping centres ? warehouses ? storage facilities ? fixer upper homes ? ANY of these property types allow you to make money once you know what you are doing.



Then spend a TON OF TIME BECOMING AN EXPERT the property type in an area. THEN AND ONLY THEN should you start buying.



And yes, better several smaller properties than one huge ones. Many properties allow you to sell one if you have to. One mistake in a big project .. and this could be the end of this property and possibly the one securing the HELOC.



More on why an HELOC (vs. a mortgage) is such a good vehicle is here: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2302-What_is_better_a_mortgage_or_a_line-of-credit_.html

 

[donksky]

You sound llike you`re not incorporating the HELOC usage costs in your assumptions - you`re going to be repaying this as well - at least the interest-only portion tha`ts required & it`s still going to cost you. We have a $200k HELOC on our residence that we can use - and I plan to use it only as downpayments and borrow the balance as a mortgage - because this way instead of using up the $200k HELOC on 2, $100k properties, you can spread it as $20k down on 10 properties - it`s like having a big cash arsenal to spread around whereas if I used up the $200k for straight purchases, my "CASH" arsenal is gone after 2 purchases.

 

[LeighF]

QUOTE (donksky @ Apr 6 2008, 08:15 AM) You sound llike you`re not incorporating the HELOC usage costs in your assumptions - you`re going to be repaying this as well - at least the interest-only portion tha`ts required & it`s still going to cost you. We have a $200k HELOC on our residence that we can use - and I plan to use it only as downpayments and borrow the balance as a mortgage - because this way instead of using up the $200k HELOC on 2, $100k properties, you can spread it as $20k down on 10 properties - it`s like having a big cash arsenal to spread around whereas if I used up the $200k for straight purchases, my "CASH" arsenal is gone after 2 purchases.


How would you be able to afford the mortgages on 10 properties vs one? Am I missing something?

 

[bobbie]

QUOTE (Turtleford63 @ Apr 10 2008, 08:55 PM) How would you be able to afford the mortgages on 10 properties vs one? Am I missing something?


Turtleford63

that was my thought as well. My understanding is if you have a 200,000 line of credit and you put $20,000 down and convert it to a mortgage of $160,000 or convert all to mortgage of $180,000 , you`ve only got $20,000 more borrowing power, certainly not enough for another piece of realestate. I don`t know how you get multiple mortgages out of this either, am I missing something?

Barb

 

[kboughen]

QUOTE (bobbie @ Apr 10 2008, 11:12 PM) Turtleford63

that was my thought as well. My understanding is if you have a 200,000 line of credit and you put $20,000 down and convert it to a mortgage of $160,000 or convert all to mortgage of $180,000 , you`ve only got $20,000 more borrowing power, certainly not enough for another piece of realestate. I don`t know how you get multiple mortgages out of this either, am I missing something?

Barb
The concept in this example is that you put $20,000 down on a $100,000 purchase; the lender provides an $80,000 mortgage.

If you had $200,000 at your disposal, you could potentially do this 10 times (conditional on income qualification, credit qualification, property qualification…..)

The concept is also that the "rent" from the tenants pays for the mortgage, insurance, maintenance, taxes, vacancies, repairs, condo fees…. for each property. It may even cover the interest on the HELOC as well.

Hope this helps.

 

[Dejavu]

QUOTE (kboughen @ Apr 11 2008, 09:05 AM) The concept in this example is that you put $20,000 down on a $100,000 purchase; the lender provides an $80,000 mortgage.

If you had $200,000 at your disposal, you could potentially do this 10 times (conditional on income qualification, credit qualification, property qualification…..)

The concept is also that the "rent" from the tenants pays for the mortgage, insurance, maintenance, taxes, vacancies, repairs, condo fees…. for each property. It may even cover the interest on the HELOC as well.

Hope this helps.


Can the bank call in the LOC? I am just wondering how much risk would someone be taking if they purchase 10 properties maxing out a $200K line of credit if the bank ever called the LOC back.

Thanks

 

[PeterKinchMortgageTeam]

QUOTE (Dejavu @ Apr 11 2008, 12:06 PM) Can the bank call in the LOC? I am just wondering how much risk would someone be taking if they purchase 10 properties maxing out a $200K line of credit if the bank ever called the LOC back.

Thanks


An LOC is just a variation of a mortgage - registered against the title of a property. The bank is no more likely to call an LOC than they would be to call a mortgage. This would likely only happen if the payments are not made.

 

[Thomas Beyer]

QUOTE (Dejavu @ Apr 11 2008, 12:06 PM) Can the bank call in the LOC? I am just wondering how much risk would someone be taking if they purchase 10 properties maxing out a $200K line of credit if the bank ever called the LOC back.

Thanks

yes, they can .. any time .. not usually done .. but a possibility ..

 

[MikeSunley]

One technique that worked well for me was to use one of my helocs to pay for a new townhouse.

Once I closed at 240k, I made some small cosmetic improvements which, when coupled with my below-market purchase price, left me open to finance it with a conventional mortgage [appraised at 288k] where I was able to recover all but 10k of my heloc money. High ratio with no insurance fees makes me happy