Using a HELOC for real estate flipping

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Jwulgaru
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Using a HELOC for real estate flipping

Post by Jwulgaru »

I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital. This is in a very hot real estate market. My conundrum is that I don't have a lot of cash sitting around; I invest almost every leftover dollar into my stock portfolio.

The option I've come up with is to leverage a HELOC to get some working capital with the intent to build up enough cash that I can then use the cash pile and forgo the HELOC.

Looking for advice, cautions, etc...
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David Jay
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Re: Using a HELOC for real estate flipping

Post by David Jay »

I will leave off the HELOC question and focus on the business
Jwulgaru wrote: Mon Apr 19, 2021 7:16 pmI have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital.
Have you looked over the books?

It is a red flag for me that this ongoing concern needs more capital from you. It certainly seems that if this was a successful endeavor that the business would be generating cash flow from past projects to invest in future projects. If they are taking more cash out of the business than the business is generating, that is not something that you want to even consider (Run, Forrest, Run!)

Now if the business is generating a lot of profit (again, look at the books) and the silent partner just wants to re-deploy some of his assets and will sell you part of his share, that is a different situation. Are you purchasing your stake directly from partner #2? What is the business structure? Is it a sub-S or an LLC?
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JoeRetire
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Re: Using a HELOC for real estate flipping

Post by JoeRetire »

Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital.
So why do they need you? Particularly when you don't have a lot of cash?

I'm always wary of investment opportunities that start out with "I have some friends...".

Good luck.
Last edited by JoeRetire on Tue Apr 20, 2021 3:30 pm, edited 1 time in total.
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wilked
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Re: Using a HELOC for real estate flipping

Post by wilked »

JoeRetire wrote: Tue Apr 20, 2021 3:11 pm
Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital.
So why do the need you? Particularly when you don't have a lot of cash?

I'm always wary of investment opportunities that start out with "I have some friends...".

Good luck.
This. Something sounds off here
Pikel
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Re: Using a HELOC for real estate flipping

Post by Pikel »

Real estate bubble 2.0 confirmed
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Jwulgaru
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Re: Using a HELOC for real estate flipping

Post by Jwulgaru »

JoeRetire wrote: Tue Apr 20, 2021 3:11 pm
Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital.
So why do they need you? Particularly when you don't have a lot of cash?

I'm always wary of investment opportunities that start out with "I have some friends...".

Good luck.
It's not a formed partnership...yet. They've been doing it for about a year. They didn't ask me for money. One of them was talking about it, and I indicated my interest. The reason they could use some more cash is tied into a delay on one property holding up some of the capital as they are starting a build on another.
capsaicinguy
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Re: Using a HELOC for real estate flipping

Post by capsaicinguy »

Jwulgaru wrote: Tue Apr 20, 2021 8:59 pm
JoeRetire wrote: Tue Apr 20, 2021 3:11 pm
Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital.
So why do they need you? Particularly when you don't have a lot of cash?

I'm always wary of investment opportunities that start out with "I have some friends...".

Good luck.
It's not a formed partnership...yet. They've been doing it for about a year. They didn't ask me for money. One of them was talking about it, and I indicated my interest. The reason they could use some more cash is tied into a delay on one property holding up some of the capital as they are starting a build on another.
Everything about this sounds like a bad idea. This sounds like a couple guys that got into the flipping game got overextended, suddenly have a cashflow problem, and are looking for some kind of angel investor. Taking out another loan against your house and handing it over based on a handshake is......not something I would do. If you do this, I would at least triple what your heloc interest rate is and have them sign a legal note to you as a short term loan. From what has been said so far this sounds like your about to lose a lot of money, I would run away.
ActiveIndexer
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Re: Using a HELOC for real estate flipping

Post by ActiveIndexer »

1. If you go forward (putting aside whether you should) demand a senior lien or significantly higher interest rate if you would be in a junior lien position.

2. For flips I would only do 60-70% loan to value so if things go south you have meat on the bone. For new builds the only tangible asset you have is the lot which means you could have a greater loss if things go wrong.

3. Consider retaining a real estate attorney for docs, questions you have and check if you can get something called a quit claim deed to the property so you don’t need to go the costly and complex route of foreclosure if things go south.

It’s not odd for a crew like what you described having multiple projects at a time and needing capital, even more so when they are new. I’ve done hard money deals with guys who have 20+ projects and always need gap funding, money to purchase a lot because construction loans require it be in their name with their own cash, etc. There are safer organizations that do hard money lending you can invest with and personally I would choose those over this situation- they have a track record, will handle deal structure and paperwork, and can answer questions. Check if you have a local real estate meetup group and maybe they have a hard money lending org or affiliate as an alternative.

To your question, using a HELOC is a good tactic for hard money regardless because you can deduct the loan interest you pay plus any fees from the interest they pay you- it’s can be considered a business expense but consult a CPA or tax attorney on that. Also equity in a home just sits there otherwise so putting it to work is smart. Your investment, if done correctly and following the rules above, is backed by a tangible asset with room for loss and multiple exit strategies if things don’t go well but understand what you are doing is extremely risky, can be complex, and you run the risk of total loss.

Everything above is my opinion, not professional advice.
LittleMaggieMae
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Re: Using a HELOC for real estate flipping

Post by LittleMaggieMae »

They've been in "business" for a year... and they need your capital. This doesn't sound good. Taking a HELOC sounds like you are thinking of giving them quite a bit of money - 50K? or more? If amount they want you to contribute is what you'd blow on a weekend in Vegas or a vacation - then I say go for it... gamble away - being out the money will buy you a good story if nothing else.

That said: I've used a HELOC on my primary residence to buy an investment property.
I've remortgaged my paid off primary residence to buy an investment property.

I did this to buy properties (one in cash) in my name with my money. I was working with a relative (mentoring me) who has 20 years of buying, fixing, renting, selling the types of "down on their luck" properties I purchased.
I recently sold an investment property and paid off the mortgage on my primary home (a second time!) - and purchased a new "fixer" with a mortgage to work on (it's habitable and a lender was willing to give me money).

I would feel VERY uncomfortable having my money used to purchase or fix up a house I did not have title/deed to. Even with the promise of a big "return" on my money from someone I trusted. Fixing up and/or flipping houses is not for the feint of heart it's expensive and a lot can go wrong very quickly. Be prepared to be out any money you "invested".
rich126
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Re: Using a HELOC for real estate flipping

Post by rich126 »

This is one of those things that works until it doesn't. About 15 years ago a bunch of people were flipping homes in AZ. In some cases not even doing anything to the home. If you were lucky and got out before things crashed you made money, others weren't so lucky.

After things crashed a friend was trying to get me to provide capital to buy properties at a bargain price. Looking back I would have made a killing but to me the risk was too high for my savings. Now if I had no debt and a few million in the bank I may have invested a decent amount but I had my own house with a mortgage, late 40s and the damage a failure would have caused would have been too severe.

Personally I think now things are way too high to invest in real estate but if you do, consider the damage if you lose all your investment.
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JoeRetire
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Re: Using a HELOC for real estate flipping

Post by JoeRetire »

Jwulgaru wrote: Tue Apr 20, 2021 8:59 pmThe reason they could use some more cash is tied into a delay on one property holding up some of the capital as they are starting a build on another.
There seems to be a hint in there, somewhere...
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ZWorkLess
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Re: Using a HELOC for real estate flipping

Post by ZWorkLess »

Nope, nope, nope. Other posters above have made clear why it's a bad idea.

I've used a HELOC to fund downpayment on my own investment house that I really wanted for good financial reasons (my college kid was living there), and it worked out great in the end. Made a good net profit at the sale 4 years later because we'd "made" a lot of money not having to pay rent and getting extra tax deductions.

But, I'd never use a HELOC to fund anything that wasn't 100% under my own control and was also really important to me. The only reason I'd ever take another HELOC would be some personal emergency or possibly another college-kid-house for our last kid.

I have a friend who is a RE investor who use HELOCs or REFIs on investment properties to purchase more of them, etc. Fine, whatever floats their boat. They're cash flowing their properties and building their portfolio slowly and intentionally. They're taking out some equity of their investment properties and redeploying it. Fine. It's all investment property and it's their business that they make money doing it and have control of the investments. Their business, their risk. Whatever.

But your own home equity is precious. Don't risk it on a risky investment, IMHO, especially when you're not 100% in control of the endeavor and don't really know what you're doing. And neither do your potential partners, IMHO. My friend who does this stuff for a living creates LLCs for each project, and any partnership deals are clearly spelled out in a contract, reviewed by lawyers, and all financial aspects are similarly very clearly set up with dedicated bank accounts/etc for each project.
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Re: Using a HELOC for real estate flipping

Post by Sandtrap »

Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital. This is in a very hot real estate market. My conundrum is that I don't have a lot of cash sitting around; I invest almost every leftover dollar into my stock portfolio.

The option I've come up with is to leverage a HELOC to get some working capital with the intent to build up enough cash that I can then use the cash pile and forgo the HELOC.

Looking for advice, cautions, etc...
1 Walk away.
2 Do not be talked into this for even a partial small investment.
3 See #1-2
4 If you see benefit in this venture, seek legal counsel first, then. . . see #3.
5 Continue working, investing in your own portfolio, living below your means, avoiding debt and leverage.

The list of downsides, dangers, and pitfalls for this type of endeavor is too long to list.
There is only 1 positive benefit to this endeavor.
1. Experience in bad investing and losing friends over money, and resolving never to do it again.

Point of view. Retired G.C. R/E Developer.
(Flippers are still marginal and risky even if one is a G.C. with financial resources and the project is handled without help or involvement from others)
j :D
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Jwulgaru
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Re: Using a HELOC for real estate flipping

Post by Jwulgaru »

Thanks guys for the input. I'm going to throw the brakes on this after reading through the advice.

The temptation of quick money that I don't need leveraged off of a house that I do absolutely need crossed my wires there for a bit.
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Re: Using a HELOC for real estate flipping

Post by bubbadog »

Pikel wrote: Tue Apr 20, 2021 3:28 pm Real estate bubble 2.0 confirmed
+1 My sentiment as well!
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Re: Using a HELOC for real estate flipping

Post by abuss368 »

Sandtrap wrote: Wed Apr 21, 2021 12:36 pm 1 Walk away.
2 Do not be talked into this for even a partial small investment.
3 See #1-2
4 If you see benefit in this venture, seek legal counsel first, then. . . see #3.
5 Continue working, investing in your own portfolio, living below your means, avoiding debt and leverage.

The list of downsides, dangers, and pitfalls for this type of endeavor is too long to list.
There is only 1 positive benefit to this endeavor.
1. Experience in bad investing and losing friends over money, and resolving never to do it again.

Point of view. Retired G.C. R/E Developer.
(Flippers are still marginal and risky even if one is a G.C. with financial resources and the project is handled without help or involvement from others)
j :D
Excellent advice Jim. The old saying if it smells bad it probably is. If there is an interest in real estate, that is one thing. This however is probably not a good way to get started.

Tony
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Re: Using a HELOC for real estate flipping

Post by abuss368 »

Jwulgaru wrote: Mon Apr 19, 2021 7:16 pm I have some friends that run a partnership where the one who is a builder and has a team does the work on remodeling/new builds and the other provides a lot of capital for acquiring properties. I have an opportunity to join in on providing capital. This is in a very hot real estate market. My conundrum is that I don't have a lot of cash sitting around; I invest almost every leftover dollar into my stock portfolio.

The option I've come up with is to leverage a HELOC to get some working capital with the intent to build up enough cash that I can then use the cash pile and forgo the HELOC.

Looking for advice, cautions, etc...
I would also not risk your primary home equity on this speculation. It is one thing if the strategy was to update a home to provide cash flow from renting and that the property was cash flow positive (stand on its own).

Speculating and hoping to unload it for a higher price while risking home equity is another matter.

Tony
John C. Bogle: “Simplicity is the master key to financial success."
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