Using a home equity line of credit, popularly known as a HELOC, is one of my favorite creative strategies for investing in real estate.
How would you like to purchase property using no money out of your bank account? It might sound like a late-night scam, but I assure you it’s not!
Let’s say you already own property. The difference between what it’s worth now and what you owe on it is called equity. Normally, in order to access that equity, you’d have to sell the property first.
An alternative way to access that equity, however, is a HELOC. This is a loan—usually a second mortgage—added on top of your existing mortgage.
A HELOC kind of acts like a gigantic credit card. It allows you access to a big line of credit, but you only pay when you’re using it. And the interest rate is actually way lower than a credit card—sometimes under 5 percent. (Something to note, however, is that the interest rate is often variable, meaning it goes up and down.)
Here’s an example:
An investor purchases a home for $100,000 with an $80,000 loan. So far, he or she has paid down the loan to $60,000. Meanwhile, the house has appreciated to $120,000.
Now the owner can take out a HELOC to tap into up to 90 percent of the current value of the home. So, 90% of $120,000 is $108,000. Subtract $60,000, representing the amount still owed to the bank. The owner can then use this $48,000 line of credit for a down payment on another property.
Pros and Cons of HELOCs
- Can use this simple lending tool to help you “find money” to do more real estate deals
- Can tap into the same amount of money you’d have if you sold a property that had appreciated, without actually selling
- Can avoid paying real estate agent, closing costs, etc., which would be required if you sold the property in order to invest in something else
- It’s a cheap financing option in terms of interest rates and closing costs
- Will cost you the equity in the original property
- Comes with an adjustable (read: unpredictable) interest rate
Watch the video above to learn more about the ways in which you can use a HELOC to expand your investment portfolio!
What else would you like to know about HELOCs? Would you ever use this strategy?
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.