How To Use A HELOC To Buy Investment Property The Right Way

Using a HELOC to buy investment property can be a massive advantage when building a real estate portfolio. In fact, when I was aggressively scaling my Detroit rental portfolio my HELOC was by far the most important tool I had available.

By leveraging my HELOC, and using it to buy investment properties, I was able to scale faster and get better deals by paying cash.

Those are some fantastic benefits.

But there are also some real downsides to using a HELOC to buy investment properties.

In fact, most people go about it all wrong. Using your home equity to put a downpayment on another property is a poor investment strategy. And in some cases it can even lead to disaster.

The reality is, most people simply don’t know how to smartly use their HELOC to buy investment property.

Let’s fix that!

Why A HELOC Makes Sense

I could write an entire post about HELOCs, how they’re calculated, structured, etc. 

And maybe I will in the future. But that’s not what this post is about. And chances are, if you’re reading this you already know what a HELOC is. 

If not, know that a HELOC is simply a line of credit, much like a credit card. This line of credit (unlike a credit card) is backed by a physical asset. That asset is your home and the equity in it.

Tapping Into Home Equity

And it turns out people often have a lot of equity in their home. As prices move up and principal paid down, that equity continues to build.

Quite often, this is most people’s largest form of stored wealth. The equity in their home may very well outstrip their cash savings.

That was my situation in 2019. My wife and I had $180,000 of equity in our home. We’d purchased in 2017 and done some remodeling.

That equity dwarfed our ~$50,000 in cash savings. 

Refinancing Isn’t As Attractive As A HELOC

With all of that equity in our home we could have simply refinanced. But refinancing would have left us with a larger mortgage payment. Our house was worth more and our interest rate wasn’t going to be any lower.

With a HELOC you are simply making interest-only payments until the entire loan is due (usually in 10 years).

But once you refinance you’re paying both interest and principal. Obviously, your payments are going to be higher! 

But beyond that, a HELOC is far more flexible. While you might have a $100,000 line of credit, you don’t have to use it all. And you only pay interest on the portion you’re currently borrowing. 

This is why, in most cases, I favor a HELOC over a cash out refinance.

Mistakes When Using A HELOC To Buy Investment Property

The problem with HELOCs is people tend to use them like cash. And that’s a massive mistake.

Remember our credit card comparison… When people use a credit card as if it were money in their pocket, it tends to lead to disaster. 

I know you’re probably a financially savvy person and would never do this. I love my credit cards and we put basically everything we can on them.

And then we pay them off at the end of the month. You would never just let that balance roll over, making the minimum payment. 

Right?

But that’s exactly what you do with a HELOC. In fact, it would be extremely rare to use a HELOC and pay it off by the end of the month in which you used it.

And even if you did, interest accrues daily and you’d owe for the time you borrowed against your HELOC.

Using A HELOC As A Downpayment

I know what you’re thinking… you aren’t using a HELOC like a credit card because you are using it to purchase an INVESTMENT.

It’s different!

And it can be. But if you’re using a HELOC as a downpayment to buy investment property you are absolutely using it like a credit card.

This is the biggest mistake people make. And let’s look at an example of why it’s such an error in judgment.

Let’s say you find a solid rental property in Detroit for $100,000 and decide to use your HELOC for the downpayment. Your numbers might look something like this:

Hmmm… that’s not good!

Clearly, using a HELOC here is a bad idea. You’d be losing money every month. Granted, it’s a small amount of money but it’s still a net loss.

And if this is all you have, with little ability to save and pay off your HELOC, you’re strategy becomes hope. You’re hoping that future rent increases will bail you out, get you a point where you can positively cash flow and pay off your HELOC.

Hope is not a strategy!

This is representative of most real estate deals where you’d be using a HELOC as a downpayment. 

Don’t make this mistake! It’s akin to the person racking up $5,000 of credit card debt when they have $500 in the bank and a net savings rate of $250 per month. 

It’s a recipe for disaster. So what’s the right way to use a HELOC to buy investment property?

The Right Way To Use A HELOC For Rentals

Quite simply, your HELOC is a tool meant to be brought out to do a job and then put away until needed again.

When I use my HELOC to buy investment property the very FIRST thing I’m thinking about is, “what’s my plan to repay this as quickly as possible?”.

The way I see it, there are three ways to accomplish this.

Strategy #1: Using Your HELOC for BRRRR Deals

The very best way to use your HELOC is to execute the BRRRR method. This is when you’re buying a property for the specific purpose of renovating it to force some equity and then doing a cash out refinance.

This is a far superior strategy than simply buying something from the MLS and putting 25% down. And it’s not for everyone.

But if you’re using a HELOC, this is the strategy you should be focused on. A BRRRR deal, by definition, is a shorter term strategy. That’s exactly what we want to use our HELOC for!

Let’s revisit the deal from above with our house in Detroit.

Instead of paying $100,000 for the property let’s say we purchased it for $76,000 and had to put $10,000 into some cosmetic updates. Once done, it’s worth $100,000 and we do a cash out refinance.

Here’s what those numbers look like:

These are actually real numbers. 

In fact, this is a deal I helped an investor do just a few months ago. In this case they left just $11,000 in the deal. 

Now, $51 per month in net cash flow is nothing to write home about. But consider, in this example you are not using ANY of your own capital. Your cash-on-cash returns are infinite because you’ve financed 100% of the deal.

The entire purchase price and rehab is funded by your HELOC and the cash flow covers all expenses PLUS an extra $51 per month. On top of that you’re getting tax benefits, mortgage paydown, and potential appreciation!

This is generally what you want to be shooting for… a deal that allows you to get enough of your money back out where you’re positively cash flowing. 

If you can do that, you’ll be covering the HELOC payments with the rental income. But you still need to pay the HELOC off at some point. If you just paid $132.50 toward your HELOC every month your payoff would look like this:

After 10 years (the typical HELOC payback period) you’d be just shy of paying it off in full. Remember though, this is JUST using your cash flow.

The $132.50 figure I came to includes the interest only payment on the HELOC ($82.50) plus your net cash flow ($51.00). With each month’s payment your interest decreases, which would increase your net cash flow, but remember we’d just be applying all of that cash flow to the HELOC each month.

You probably don’t want to wait 10 years to pay the HELOC off. You could use monthly savings to accelerate the payoff or even the capex/vacancy/repair hold back since that isn’t a monthly expense.

And if a capex item came up you could always tap into the HELOC again. Finally, it’s highly unlikely that rents don’t go up during that 10 year timeframe. I tend to raise rents on my properties a bit every year. That would give you more cash flow to throw at the HELOC and pay it off that much faster.

Ultimately, this is why I love BRRRR’s. They put you in a position where you can leverage tools like HELOC’s smartly. We do BRRRR’s like this all the time, and it’s a fantastic strategy.

Strategy #2: Paying Off Your HELOC With A Liquidity Event

But let’s face it, executing a BRRRR isn’t for everyone. So how else might we use a HELOC to buy investment property if we don’t want to BRRRR?

Let’s say a great real estate deal comes up. You have some cash savings, but not enough to pull the trigger on the deal.

But you also know you’ll be receiving a bonus from your job in 2-3 months. 

This is a great place to use a HELOC to bridge the money gap. In fact, you could even use it to put 25% down. You’re ok financing the down payment because you know you’ll be paying your HELOC off as soon as your bonus comes through.

And since it’s a fantastic deal, it makes sense to pay the interest until you receive your bonus.

If we go back to our Detroit deal example once more, it would be like putting 25% down and losing that $55 per month for a couple months and then paying off the HELOC in one lump sum.

Once done, the numbers look like this:

You’ve eliminated the HELOC payment, boosting your cash flow to a positive $133 per month. 

You still have $25,000 left in the deal because you paid the full amount that was initially borrowed from your HELOC.

With a little math…

$133/month x 12 months = $1,596/year divided by $25,000 cash invested

…we have a cash-on-cash return of 6.38%. Not bad!

You don’t necessarily need to pay off the HELOC in one lump sum. If the deal makes enough sense to YOU, there’s always an option of paying it off over time but still aggressively.

Strategy #3: Monthly Savings To Pay Off Your HELOC

This strategy is a lot like our BRRRR example where we used cash flow from the deal to pay off the HELOC. That said, it’s a bit more dicy because we’re not generating positive cash flow from the start like we did in our BRRRR deal.

But it’s definitely an option.

If you’re a diligent saver and live below your means you could justify using a HELOC to buy investment property with the plan to pay the HELOC down in a handful of years.

Let’s take our example from above again and assume you save $1,000 per month of your take home pay each month like clockwork.

If you borrow $25,000 from your HELOC to use as a down payment and apply the $1,000 in savings each month to paying down the balance you’d have your HELOC paid back in 29 months. 

It would also cost you about $2,788 in interest payments.

I don’t love this strategy because you’re carrying the HELOC balance for a longer period of time and you’re exposing yourself to external risks. What if you lose your job? What if you have an unforeseen increase in expenses and can’t save $1,000 per month?

Ultimately, you’d be stuck with a non-cash flowing property.

That said, you are able to get into a deal sooner than just saving your $1,000 each month until you have enough for a downpayment. That means you’re getting potential appreciation, mortgage paydown, and tax benefits you wouldn’t be getting if you waited. 

Be Smart With Your HELOC

Ultimately, you need to be smart about how you use a HELOC to buy investment property. If you don’t, you could end up “stuck” with high interest debt and no way to pay it off.

That’s the last thing you want.

Have a plan. Generally it’s going to be one of the three I outlined in the previous section. 

Also, make sure you are comfortable servicing the extra debt. 

Even if you have a plan to pay off your HELOC you’re going to have several months of interest payments. If that makes you uncomfortable, maybe using a HELOC to buy rentals isn’t right for your personal risk tolerance.

Lastly, it’s best to use a HELOC alongside some previously established cash savings. Again, think back to our previous deal in Detroit. If you had $20,000 in savings and a $100,000 HELOC you could pay the HELOC back in full after the cash out refinance.

Your savings would simply be a bit less than it was before. 

I actually carried my HELOC balance for 2.5 years, but I had a long term plan to pay it all down, could service the debt comfortably, and was constantly paying it down and redrawing on it as I scaled my real estate portfolio.

Ultimately, your risk tolerance should drive how you decide to leverage your HELOC when investing in more real estate. Be honest with yourself and where you’re comfortable (and where you aren’t) and let that drive your strategy.