Investment Property HELOCs Come With Terms That Kill the Deal
Real estate investors struggle to access flexible and appropriate financing for property upgrades and expansion. They face challenges like lender unfamiliarity, restrictive HELOC terms for investment properties, and difficulty securing loans through unconventional structures like irrevocable trusts. Finding suitable lenders and navigating complex paperwork are common frustrations.
SOURCES (60)
“Even if you make a cash offer, you can still get a mortgage at the time of purchase (the contract just wouldn’t be have a contingency for your financing). With the way that you did this, the loans will finance as a cash-out refi, so…”
“The 25k is the holdback which means, lender wants me to spend the first 25k before they can reimburse the draws. It's because the under writing team wanted to go with market rate per sq ft cost instead of my estimate especially as a first time GC. Also the interest is calculated on a draw basis not throughout the term of the loan. They got 1k+ with origination fee as its on the loan amount,”
“The lender bumping you from 480k to 550k is interesting because that happened to a buddy of mine on a ground up build, and at first he was like great, more cushion. Then the debt service on the extra 70k started eating into his cash flow projections in a way he didn't fully model out before closing. Not saying it's bad, just that the carry cost on that gap is real money every month you're in construction. His project ran about 4 months over schedule and that spread between what he ne”
“for a passive spot like this a flat rate of return will mislead you, the refi is the whole thing. once they hand back 50-75% of your 250k around month 18 but you keep your full stake, the actual money you have left in the deal drops way down while the distributions keep coming, so your return on the cash thats still in there jumps a lot. id track two things instead. equity multiple, which is just total cash you get back divided by the 250k you put in. and IRR, which actually accounts for getting”
“Having the $90k liquid will do more for your position rather than having $90k less low interest debt. Maximising your liquid cash to use as a deposit will be the best case scenario as your affordability for the debt shouldn't be an issue, and your ability to service the larger debt will be minimally impacted by the $90k remaining on current mortgage.”
“A common strategy is to heloc the current property to pay for then new property; then close/pay the heloc off when the property sells But yeah - cash is king with RE so I’d stay cash heavy since you want to pounce if the perfect property is listed next week or next year”
“I'm selling an inherited property, I have a signed contract. It is court ordered sell so looking to close in 90 to 120 days. I need a small 5k loan with guaranteed repayment at closing by the title company...any private lenders available to help?”
“You'll be fine. As ridiculous as it may sound and feel, it's still worthwhile to actually write out a budget and review it regularly. You have a lot of "rounded" and "approximated" numbers in your presentation. Getting more granular will help you become more efficient with your money. But even if you didn't, you have enough money/income to absorb that inefficiency and you'll still be fine.”
“The fee stack is fairly standard for hard money on a ground-up build, but worth flagging, keep your $60k contingency genuinely separate in your own tracking from the committed $550k, since the lender bumping you from 480k to 550k means you're paying origination points on money you may never draw. Ask the lender directly what pushed the number up, if it's their loan-to-cost or debt service coverage requirement, that's structural and worth understanding for your next deal too, if it wa”
“The fee stack itself looks in line for hard money on a ground-up build. Two things I'd double-check rather than the total: Your origination is labeled 2.5%, but $13,125 is 2.5% of $525k, not the $550k loan (2.5% of $550k would be $13,750) and not your $480k request. Worth asking the lender which balance they actually based it on. The base used for origination is negotiable more often than the rate is. The real extra cost of being pushed from $480k to $550k is the origination points on that e”
“Did you figure this out? Curious on which direction you moved forward in. You can get up to 80% LTV on DSCR as long as the ratio is greater than one and you have good credit. With higher LTV comes higher rates as well.”
“origination fee seems a bit high but when you got no other lenders lining up you take what you can get. the loan amount jump from 480 to 550 is interesting though, wonder if they just want more interest off you or if the appraiser found something that made them push it up good luck with the build, self GC first time is brave but i seen worse plans work out”
“What city is this in? You can also a bridge loan (based on equity you have) if you need to close it quickly. At those numbers, you could buy using bridge and refi it into a DSCR with 75% LTV. We do that all the time!”
“Follow up to post-1: https://www.reddit.com/r/realestateinvesting/s/ccFoDA7rEX We finally closed on the construction loan with hard money lender. It was smooth but expensive. It was a total of $20.86k Breakdown: Origination(2.5%): $13,125 Processing Fee: $2,495 Appraisal: $1,500 Environmental Report: $500 Closing Attorney: $2000 Lender's Title Insurance: $1,044.00 CPL Fee: $25 Deed Fees: $171.25 My budget was 420k, I added a contingency of 60k, and requested total loan amount of 480k. But th”
“We finally closed on the construction loan. Lender required me to go with 550k budget, and I had to update budget for all line items to sum upto 550k. We're breaking ground tomorrow.”
“I’d turn this into a return-on-equity question, not just a rate question. The 2.25% debt is valuable, but the equity still needs to be measured against what you’d actually net after sale costs, taxes, and depreciation recapture. I’d model sell now, finish unit 3 and hold, and hold five years at the rent number you think is realistic -- using net cash flow after vacancy, repairs, capex, and management even if you self-manage”
“Trust what you noticed. He's getting a DSCR loan for 80% and only paying you 50% at close, so he walks away from closing with ~30% of the purchase price in cash, and you finance the rest. That's negative skin in the game. Your carry sits behind an 80% first lien. Combined, that's 130% of value in debt - meaning your note is effectively unsecured. If he defaults on the first, you don't "get the property back," you're a junior lienholder who has to foreclose and eithe”
“I'll begin by saying that I understand an HEI gives away a significant portion of FUTURE equity from the time to take the loan until you sell/refi/pay-back. I don't know how much or what %. That's about all I know about HEI's, so I'm looking for any words of caution or reasons that I'm not thinking of. I have a large amount of equity in my house, looking to access no more than 25% of my existing equity. If there are other ways other than HEI, I'd love to hear about th”
“After COC is issues for combined 6 unit building, we will refinance and pay off construction loan and existing 3 unit loan”
“Hello, I am seeking help in understanding margin withdrawals, specifically the risk of running into a margin call and and understanding the maintenance requirement. A little backstory, we moved almost 2 years ago and got a really crappy mortgage rate when we moved. At the time it didn't bother me as a anticipated the rates dropping and being able to refinance. However, the rates haven't dropped as much as I anticipated and the costs to refinance don't seem to make refinancing feasibl”
“I’ve been in business since 2019. Been leasing my current building, with the option to buy, for the last 4 years and have one more year remaining on my lease. I own the business and all property within the building 100%. I just started the process of getting an SBA loan to buy the property but another business owner suggested that I look into owner financing and see if my landlord would be open to that. I’ll admit that I know nothing about owner financing other than the obvious. Can someone expl”
“My husband & I own a home. We owe $32,400 on it & our interest rate is 4.250%. We took out a HELOC in order to finish the basement with an added bed & bath & finished living room. Our HELOC is sitting at $58k with a 6.750% interest rate. We were hard for money for quite a while and have been renovating things here and there in our home, to which we decided that the HELOC would be used, and that we would just pay it off when we eventually sell our home. Our family is out growing t”
“You can't ask that without context. What's the term of loan? What's the cash flow of the property? What's remaining balance? What does the seller want? If you want 30 yr am/10 yr balloon ask them what they want their monthly payments to be, and then work from there. They may want higher interest and no am for tax planning, They may want lower rate with accelerated am to reduce their exposure.”
“Nice! Im in Kc. I end up using a local lender and do all my deals at 30% down 15 year loans to drive the interest as low as possible. It makes it costly upfront, but my retirement goals are being met.”
“That's a great catch, and honestly, I didn't explicitly model lender willingness to finance that scenario. I just assumed conventional financing was available at my stated rates. That's a gap. In practice, you're right to be skeptical. Most lenders have minimum property values or get squeamish on refi for sub-$50K purchases, especially if the property still needs work. And appraisers on cheap properties are notoriously conservative on ARV, which kills the refi case even if the le”
“Do you model the low value mortgage problem? I doubt you could get a 30 year mortgage and a refi on a 40k property that needs significant repairs?”
“I wouldn’t assume that owning 19.95% automatically keeps you out of a personal guarantee. The 20% rule people commonly reference is largely associated with SBA financing. Under SBA rules, owners of 20% or more generally must provide an unlimited guarantee, but the lender may still require a guarantee from someone who owns less than 20%. For a conventional commercial mortgage, there usually isn’t a universal rule saying anyone below 20% is automatically exempt. The lender can set its own requirem”
“My bank wont do a HELOC on an investment prop, and even if they did, the rate would be even worse than a refinance (prob like 9%)”
“If you were given ten billion dollars to create your own mortgage product, who would it be designed for and what would the basic criteria be? For example, will there be limits for loan to value, a minimum credit score, down payment, etc and what would the limits be? That’s the question they want you to answer along with TWENTY OTHERS! For a position paying 21 to 25 dollars an hour😀😀😀😀😀😀😀😀😀 I don’t know what companies need to hear this, but this is an interview question not an applicatio”
“Is there such a thing as a personal line of credit, perhaps using the house as collateral if necessary? I have a manufactured home that is 6 years old. It is on a permanent site, attached 2 1/2 car garage on land that I own. I own my home and land outright. The deed is in my name only.I also own my 5 year old car outright. I have about 15k in my savings account. My credit rating is about 755. Currently, I have about 30k in credit card debit. It accrued when my late husband became critically ill,”
“This ends badly, but you want 15 year terms. Heloc/second mortage on your home. Business loans dont go out that far unless you are foung large deals and established. If you needed 50 million and been in business for 20 years then maybe.”
“Hello! My wife and I are buying a house. We have a few different options as far as financing goes and I’d love some opinions. Our current mortgage is $1700/ mo. We have a heloc as well as other financed house debts that we will be paying off with the equity from our current house that add up to about $800. The new house we’re under contract for is 445k. We have about $60k to put down from equity (after paying the realtor and heloc off). I have a IRS debt of 18k from the first year running my bus”
“You need VC funding because there is no lender who will give you better terms (or any for that matter) than what you’re getting from a personal loan. If 5-7 year call periods are too long for what you’re trying to borrow, you’re borrowing too much and will be over-leveraged. ESPECIALLY, since you lack revenue.”
“We have a $80k HELOC at 6.25% that we took out $60k for home improvements. We discovered horrible damage that needs to be corrected and will cost $120k which is more than we can afford by about $20k. The house in current condition would not be usable for additional credit. Should we pay off the HELOC so our DTI is good and then apply for loans through the builder or maybe a 0% APY credit card? Then pull out the rest of the HELOC after another loan has gone through? Does having a HELOC count agai”
“Looking for input from those with SBA lending or underwriting experience. I have an SBA 7(a) loan application in underwriting to refinance several high-interest business loans/lines of credit into one SBA loan. The refinance would reduce my monthly debt payments by several thousand dollars, significantly improving cash flow. The debt is current and consists of business loans/lines of credit—not merchant cash advances. I also have substantial equity in commercial real estate that I own personally”
“I'm starting to a business and I have already done a deal. Im buying inexpensive single family homes in the midwest. Properties are 20k-60k each. I'm trying to build relationships with private lenders who would be secured by the mortgage. I'm not looking to raise money through this post specifically I'm more interested in learning how to find investors. I do not need many just a few people. Where do you find lenders? I have propstream, should I either text or cold call owners or”
“I own a manufactured home outright. I rent the property it's on from Sun Communities and pay about $780/month in lot rent. I've been slowly increasing my credit score after trashing it some ten years ago. Equifax has me just over 700, but Transunion is lower. I had the subfloor replaced and new high-end vinyl put down about three years ago. It's a long story, but it appears that the moisture barrier under the house failed soon after replacement of the floors. I'm now at the point”
“The Expense Lever is Theoretical. Banks and appraisers are going to use Market Standards / Averages to value your property for purchase or refinance. So you need to control your expenses, and be sure to properly categorize your expenses vs capital expenditures. Changing to a cheaper landscape guy is not going to increase the value of your property. In specific how does one reduce expenses in a non-residential commercial property? NNN, CAM Bill Backs, Challenging Taxes, proper maintenance contrac”
“All of which is to say, rising 10 yr Treasury rates should increase the attractiveness of interest, in either HYSA, money market funds or T Bills themselves, which means maybe more income will be taxed at ordinary rates rather than LTCG rates. Ok, that happens every time interest rates rise. As liquidity moves from equities, which should face a higher interest rate environment as a headwind, to interest bearing products, this could also mean lower future returns on equity and thus lower future c”
“both work fine honestly, main difference is HYCA (cash account) vs HYSA (savings account) is mostly about the structure and account features, for your use case (need accessibility for repairs/emergencies plus earning yield) a HYCA tends to be simpler since it's just one bucket with check-writing/debit access built in, whereas a HYSA usually has withdrawal limits that could be annoying if you need the money fast given your PMC is already taking out expenses before it hits your account, you do”
Borrow against it and buy another property. Absolutely do not sell
“It’s cash flowing he can put that into the S&P he could buy bonds he can go buy another property. You don’t need a heloc to unlock money from property you can use the property itself. Their are tons of ways to access more capital and be set for life”
“I would make this a return on equity question, not a rate question. A 2.25% loan is a real asset, but the equity is also doing work or not doing work. Model three cases on one page: sell now after a CPA confirms the tax treatment, finish unit 3 and hold at $5,500 gross, and hold five years at the $6,000 gross number. For each case, use net cash after sale costs and taxes, annual cash flow after vacancy, repairs, capex, and PM even if you self manage, and the cash on equity you are actually earni”
“I did not buy down, it was the the market rate for the FHA loan I got. I put 10% down on my loan so in 2031 (10 years after origination) my PMI will disappear as well which will add back another $250ish per month to my profit.”
“Curious - what are you doing about the loan? When you go from 3 to 6 you can’t use a residential loan anymore right? If it’s an area that will hold up the value or appreciate, I would definitely go with mini split. If not, windows units.”
“You asked for how things can go south? "...but I'd like to buy the second house ASAP". More often than not, this kind of "want" is a recipe for disaster. From a personal standpoint, I'd never do it. I'm admittedly adverse to debt, but it doesn't sound like a good plan to me. Please think through the complete finances of your decision.”
“Out of curiosity, why? Are you looking to use the second home to rent? Is there a particular urgency that would prevent you from saving up since you don't have a mortgage? What value does owning a second home afford you and is that value greater than the risk of taking on the HELOC?”
“> I currently live in one of the 3 homes but am wanting to buy another property. Yes that was already covered in your OP. > If I keep the triplex, and rent out the 3rd home, I estimate I will get $6k/month in rent. And that rent is not worth the risk. And the returns are not worth risk. Finally, birth rates per birthing person have cratered. Long term outlook for real estate is not good If you want boost your chances to retire when you want, live in the triplex or sell it.”
“I've Googled and read a few things about this and I'm seeing wildly different advice. Some threads are like "absolutely stay away from HELOCs!" and other threads are like "A HELOC is a fine option." So now I decided to post specific to my situation for more direct advice: I have a fully paid off home (let's say $250k value). I'm interested in buying a second home, and I'd like to tap into 50% of my primary home's equity in order to make a down payment”
This makes a lot of sense but also gave me another question, what about making extra payment until we can refinance to a non-jumbo loan? I assume you could get better interest…
“Hi all. Has anyone worked a type of 1031 called an Improvement Exchange - which allows some of those funds to be used for renovations? I’m looking for a verifiable “qualified intermediary.” Appreciate your help. submitted by /u/Optimal-Daikon-4470 [link] [comments]”
“your instinct about not increasing your mortgage as the first move is sound locking in a 3% rate on a property that cash flows $1,300-$2,000 a month is genuinely hard to replicate right now and giving that up to buy a bigger primary is a tough trade off financially even if it makes sense for the family. the STR angle is appealing on paper but the markets that pencil out well are getting increasingly competitive and a lot of municipalities are tightening STR regulations, so due diligence on local”
“If you're buying an investment property with a mortgage, you're definitely not getting cash from the bank. I would bet here, that the mortgage is on their primary house or some sort of HELOC, not a mortgage on a new property they were supposed to buy. You can basically put down on the loan documents you're going to fly to mars with the 200k and whatever happens happens if its backed by a property you already own.”