Mortgages & Creative Financing

How I Went From 3 to 20 Properties Using the Power of Home Equity Loans

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aerial view of residential housing

Have you ever had an idea brewing in your head for years and then woken up one day and decided—no excuses—you’re going to just do it?

And you do, going so far as to execute it with the fervor you had dreamed about. You’re unstoppable!

This is the attitude I had the day I jumped into real estate full time.

However, after rehabbing a few properties, my progress came to a standstill. I was held up by the second-to-last “R” in the BRRRR strategy—the dreaded “refinance.” I wouldn’t have more cash to deploy in more deals until I was able to refinance.

Limited capital is the single biggest reason newbie investors are unable to scale. But I wanted to avoid knocking on the doors of private lenders or exploring partnerships. To keep growing my real estate portfolio, I had to find more capital within my existing properties.

And I did! How? Through the power of home equity.

In one year, I grew my portfolio from three to 20 properties by turbo-charging the BRRRR strategy with home equity loans.

How Does a Home Equity Loan Work?

As the economy has improved during the past few years, most of us have seen our property values rise—especially in the hottest real estate markets. There are three ways to tap into this equity: selling, cash-out refinancing, or borrowing against the equity.

If you’re locked into a good interest rate, you may not want to sell. This is when exploring home equity loans is a viable option.

What Is a Home Equity Loan?

This strategy doesn’t require selling your primary residence or refinancing the existing mortgage on it. Instead you’re borrowing against the property, tapping into its equity. This is also possible with rental properties that are either owned outright or have high equity.

With a loan secured against the equity of your property, you can free up funds to further your real estate portfolio.

Home Equity Loan Rates and Other Calculations

Home equity loans are distributed in a lump sum, and the interest rate is fixed. According to Bankrate.com, today's average home equity loan rate is 7.94 percent.

So, how much can you borrow anyway?

Let's talk about the concepts of market value, equity, and loan to value (LTV). For simplicity's sake, I'm leaving closing costs out of these equations.

Market value in simple terms is what the home is worth. It’s best to hire an appraiser to determine the true market value, but alternatively, you can save around $600 and get good feel for what it likely is based on a comparative market analysis (CMA).

Say you own a home with a market value of $100,000. If you own it outright, you have $100,000 of equity in it. But if you have a mortgage of $45,000, you have $55,000 of equity in it.

Some lenders will lend you up to 90 percent of your equity in your primary residence. This equates to a 90 percent LTV.

So, in a $100,000 house with $45,000 mortgage, that means you can borrow:

$100,000 X 0.9 – $45,000 = $45,000

This is not the case in a rental property. Most lenders offer 75 to 80 percent LTV on rental properties.

In a $100,000 rental house, that means you can borrow:

$100,000 X 0.75 – $45,000 = $30,000

Of course, these loan opportunities come with some pretty stringent conditions and take into account your debt to income ratio, credit score, and so on.

What is BRRRR?

As mentioned above, I employed the BRRRR method to acquire more properties.

For those unfamiliar, BRRRR stands for buy, rehab, rent, refinance, and repeat. It is one of the most powerful strategies in real estate to grow one’s portfolio.

A key component of this strategy is purchasing a property that needs work. The next steps are rehabilitating it, renting it out (also known as stabilizing), and then approaching a bank for refinancing and pulling the original funds out to do more deals.

Related: BRRRR Investing: The Ultimate Guide to the Buy-Rehab-Rent-Refinance-Repeat Strategy, Made Simple!

Confident young woman standing on an urban rooftop daydreaming with her arms folded backlit by the bright flare of the rising sun

How to Borrow Money Against a Property’s Equity

Let’s talk about the borrowing part. There are two options to borrow against the equity in your property:

Home Equity Loan

With a home equity loan, you can take all the cash upfront and repay the loan over time in fixed monthly payments. The interest rate will also be fixed for the life of the loan, which is amortized over an agreed upon number of years.

Line of Credit

You can establish a real estate line of credit (LOC) for the maximum amount your situation allows and only borrow what you need, when you need it. Having a line open for the maximum amount will not usually cost you anything extra either.

The LOC option is very attractive to BRRRR investors, as he or she will be able to pay off this money when the property is refinanced, then repeat this process over and over. This option is also very flexible because you only pay interest on what you use from these available funds and can borrow multiple times if feasible.

There is a drawback to LOCs compared to home equity loans, however, in that interest rates are typically variable (read: may increase).

Which Option is Better?

Having tried both, I can say that if you are using home equity loans or LOCs as part of the BRRRR strategy, they are both fantastic tools to scale.

Yes, LOCs do give you more flexibility in the sense that you can treat your LOC like a credit card. Borrow money when you need it to purchase and rehab a property, and then pay it back once you rent and refinance, then repeat.

However, you can replicate the same model with a home equity loan. Simply utilize the method outlined above to take a loan out against the property's equity, thereby rolling the funds into the next deal.

After speaking with multiple banks about this, I have realized that local credit unions are the best bet for these loans. Reach out to several in your area in order to get the best terms.

How I Grew My Portfolio With Both Home Equity Loans AND Lines of Credit

Now for the meat of the story. I used both strategies in order to drastically grow my real estate portfolio—fast.

Here’s how I did it, step by step:

  1. Allowing Equity Growth: One of my rentals had about $150,000 in equity. We had purchased the house in an up-and-coming neighborhood, fixed it up while we lived in it, and stayed there for six years , giving it a chance to appreciate in the growing market. When we finally moved to a new home, I rented out this property and was making a pretty great cash flow.
  2. Obtaining a Home Equity Loan: I then started calling local banks and credit unions, asking if they'd be willing to take second position on this property that was now a rental. I didn't realize how difficult this would be to accomplish. But after many failed attempts, one credit union finally came through. They ended up giving me a home equity loan without even doing an official appraisal on the property. I could have opted to hire an appraiser and received a higher loan, but I still wanted this property to cash flow, so I left some equity in it.
  3. Deploying the Funds: I used this money as 15 percent down (with closing costs that came out to be around $20K each) with a hard money lender who I already had a relationship with to borrow acquisition and construction funds for four single family homes.

Here is what a typical purchase looked like (I rounded the numbers to make it easy):

Purchase Price: $70,000

Construction Budget: $30,000

15% Down Payment: $15,000

Closing + Financing Costs: $5,000

Total Cash Needed to Purchase: $20,000

First Upfront Contractor Payment: $5,000 (repaid by lender by the end of the project)

  1. Refinancing and Pulling Cash Out: After I was done rehabbing the properties and renting them out, I started calling local banks, inquiring about the ones that didn’t have seasoning requirements and applying for permanent loans. All said and done, when I refinanced the properties, I was able to pull out about $30,000 on average per property while still making a cash flow of $500 per month for each property.

Market Value after Rehab and Rent: $160,000

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Closing Costs: $2,500

Other Costs (i.e., Holding Costs): $2,500

Cash Out at 75% LTV: $30,000 (which is $10,000 more than what we invested)

Equity in the Property: $40,000

  1. Rinse and Repeat: I would have been able to pay off the home equity loan within less than a year of borrowing the money. Instead, I kept going and rolled the money to acquire more single family properties, repeating the BRRRR process again and again. And the same loan has financed my latest nine-unit acquisition.

Because this worked so well for us, I took out another LOC against my current primary residence, which we rehabbed while we lived in it. This loan will fund a 15- to 30-unit building that I'm currently in the market for.

Related: What’s Better, a Home Equity Loan or a HELOC—(Home Equity Line of Credit?)

Advantages of Home Equity Loans

There are certainly advantages to utilizing this borrowing option, including:

  1. Interest rates for such loans are significantly lower than credit card interest rates. I’ve seen some aggressive fellow investors use credit cards for down payments for their BRRRR strategy. This is a much lower risk option.
  2. This debt is looked at more favorably by banks than credit card debt, giving you a higher chance of getting approved for permanent loans in the future.
  3. If funds are used for home improvements, the interest you pay on the loan is tax deductible.
  4. Most importantly, you can keep an existing property, furthering your portfolio by avoiding selling.

Drawbacks of Home Equity Loans

Would this strategy mean that you’d be more leveraged? Absolutely! It goes without saying that the deals that you do (especially in the market cycle that we are in) need to be not just good deals—but great.

That being said, here are a few drawbacks of this strategy:

  1. Your debt to income ratio (DTI) takes a hit. When you borrow money in your own name, your debt to income ratio goes up. If you borrow money under an LLC but personally guarantee it, your global DTI comes into play. It is harder for banks to give you permanent financing when they see that your DTI doesn’t meet their standards. So, it’s best to only take on an amount of debt that will keep your DTI at a good level.
  2. There’s lower cash flow on properties with home equity loans, meaning they aren't as profitable until the loan is paid off.
  3. It requires discipline to not consider the money that came out of a BRRRR as income and propel it to further one’s portfolio.

Considering Alternatives: Should I Refinance or Sell Instead?

A cash-out refinance may have similar benefits to a home equity loan. Cash-out refinance simply means converting an existing mortgage into a new one at a higher amount based on the equity. It translates into a single mortgage with higher monthly payments than before because of the increased amount borrowed.

The great thing about this option is the entire loan can be amortized over a longer period of time than a typical home equity loan. Plus, the interest can be fixed.

The disadvantage is that the home equity loan can be paid off and the monthly payment would go away. But once you refinance, you don't have that benefit.

Selling is always another option, particularly if tapping into the equity hurts the cash flow to a point where the original investment is not profitable anymore. Keep in mind, though, that closing costs and capital gains will lessen your cash-in-hand after selling a property.

I'd love to hear more about what you are doing with your property that has appreciated – are you selling, refinancing or looking into borrowing against the equity with a Home Equity Loan or an LOC?

What you are doing with your property that has appreciated? Are you selling, refinancing, or looking into borrowing against the equity with a home equity loan or LOC?

I’d love to hear from you in a comment below. 

Palak Shah is the owner and founder of Open Spaces Capital, a real estate development company and Open Spaces Women Portfolio Plan, a coaching program to empower women with knowledge to build wealth and financial independence using the BRRRR strategy for real estate investing. She graduated with a masters in Mechanical Engineering from the University of Illinois and has worked as an engineer in various industries and capacities. After the birth of her two kids and realizing that she needed to create a life with financial independence that allowed more time for her family, she decided to make the move to entrepreneurship. Though Palak has invested in real estate for many years, in her first three years investing full-time, she purchased, renovated, rented, and refinanced properties creating a portfolio worth $3.5 million. She was honored by Billy Penn in the “Who’s Next Real Estate and Housing” series highlighting Philadelphia’s most dynamic real estate, housing, and development professionals under the age of 40. She was also featured in the .Real Estate InvestHER’s recent podcast episode.

    Jeffrey Gordon Investor from Spokane, Washington
    Replied 7 months ago
    Gotta love those house prices!
    Palak Shah Developer from Philadelphia, PA
    Replied 7 months ago
    Thanks for your comment. And yes!
    Sarah A. Investor from Murfreesboro, Tennessee
    Replied 6 months ago
    Yes, that is an essential component to this plan that a new person might miss. You have to be finding sweet deals for these numbers to work.
    Anthony Jozwiak
    Replied 6 months ago
    Can you clarify the house prices you mentioned under deploying funds. Did you buy 4 houses for a total of 70K…. or 70K each?? How big were these four houses? It only cost 30k to rehab them to increase their value 160K? What city was this in?
    Palak Shah Developer from Philadelphia, PA
    Replied 4 months ago
    Hi @Anthony Jozwiak, as I mentioned above, those numbers represented a single typical purchase and rehab. We are based in Philadelphia and these are single family row homes around 1100 sq ft.
    Roger Mohnani from Richmond Hill, New York
    Replied 7 months ago
    excellent thanks for sharing
    Palak Shah Developer from Philadelphia, PA
    Replied 7 months ago
    Thank you for your comment and so glad I was able add value.
    Wilson Churchill from Madison Heights, Michigan
    Replied 7 months ago
    “It requires discipline to not consider the money that came out of a BRRRR as income and propel it to further one’s portfolio.” Keep some of the proceeds as an emergency fund..
    Palak Shah Developer from Philadelphia, PA
    Replied 7 months ago
    Thanks for the comment and absolutely agree. Putting a percent towards reserves is a part of the strategy for a rapidly growing portfolio. We keep a pretty healthy reserves and recommend that everyone do the same.
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Great post! Appreciate you breaking down the ins/out of HELOCs and HE loans. You mentioned credit cards being an aggressive way to come up with a downpayment. Maybe, maybe not. I would say it depends. For instance, I have a 50K biz credit line (credit card) that routinely offers me 0% interest for 18 months on cash advances. Purpose of funds can be anything (no restrictions). All I pay is a 1.99% transaction fee. If used for a fix n flip, or a BRRR on a rental, and these funds are replaced in 6-12 months I’ve just gotten interest-free funding! All you have to do is make the minimum monthly payments to remain in good standing and avoiding the default APR. I’ve done this 4x in the past 5 years. Always works out!
    Davido Davido Rental Property Investor from Olympia, WA
    Replied 6 months ago
    Thank you, Palak. Your post is inspiring.
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Thanks for your comment. I’ve run into many who would be willing to pay around 20% interest for this same feature because it is for a short term – which is definitely an option, however, it is simply more aggressive than a Home Equity Loan. I agree with your strategy. I have also utilized the 0% APR with a few % transaction fee option on my credit line before. It is one of the less aggressive ways to use credit card lines to fund real estate deals.
    Edgar Butler Jr Rental Property Investor from Atlanta, GA
    Replied 6 months ago
    Great article Palak! Thank you for the detail and explaining the differences as well as the pros and cons of the HELOC, HE Loan, and the cash-out refi. I also like the fact that you touched on the potential lower cash flow. I think we hear a lot about cash-out refi, HELOC, and HE Loan strategies to increase the number of doors, but I find many times the article or video doesn’t address the lower cashflow that potentially can come with using these strategies. By understanding the lower cashflow it can help with understanding the importance of knowing your numbers before using one of these strategies.
    Reggie Wirjadi from San Francisco, CA
    Replied 6 months ago
    This might be a dumb question but when we’re talking about lower cash flow, that’s because you’d be paying off your original loan AND the HELOC off right?
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Thanks for the note. Absolutely – comparing the updated cash flow numbers between multiple options is a must before proceeding with any option to tap into the equity. Granted, change in cash flow isn’t the only consideration, but it is definitely an important one.
    Brian S. Rental Property Investor from Bellefonte, PA
    Replied 6 months ago
    Great Article Palak! I started investing in real estate about 16 months ago and I’m closing on my 6th and 7th rental properties currently. I have a HELOC on my personal home and a Business Line of Credit (2nd position mortgage) on one of my rental properties. I’m looking to scale to 20 doors. Thanks for sharing your knowledge and motivating newbies like myself! Brian Sr
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Thanks for your kind words Brian Sr. Wishing your a successful 2019.
    Ronak Shah from Paramus, New Jersey
    Replied 6 months ago
    Great article Palak! I am going to call credit unions, local banks in area of my rentals to tap some of the equity to expand portfolio!
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Thanks for your comment Ronak. I am glad it was helpful! Let me know how it goes.
    Sean Cullen Rental Property Investor from Warner Robins, GA
    Replied 6 months ago
    Excellent article Palak! This is great for new and experienced investors. Thank you for sharing.
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Thank you for your comment @Sean Cullen. Appreciate it!
    Daniel Haro Professional
    Replied 6 months ago
    Hi, quick question, I’ve been asking around and most banks won’t do HELOCs unless you’re borrowing against your homestead. How did you deal with this?
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Hi @Daniel Haro – I did have to call a lot of banks before I was able to make this possible. It is worth the time and effort it takes.
    Abdul Mubeen
    Replied 6 months ago
    Great Story . Can you please help me to buy the properties in your place . This is Abdul
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    I am not sure exactly what you’re looking for but I do appreciate your comment.
    Kyle Shankin Rental Property Investor from Oakland County
    Replied 6 months ago
    Nice article. I just wanted to note that I was unable to get a home equity loan on my rental property and had to do a cash out refinance instead; this happened about a month ago. I was told a home equity loan wasn’t possible because the house wasn’t my primary residence. Any idea if this varies from state to state? I suppose it’s possible that I didn’t ask enough lenders specifically about a home equity loan.
    Palak Shah Developer from Philadelphia, PA
    Replied 6 months ago
    Hi @Kyle Shankin – Thanks! I would recommend talking to other local investors to find out what banks they have had luck with. I did call a lot of banks 🙂
    Daniel Somers Rental Property Investor from Tiffin, OH
    Replied 6 months ago
    Love this article, sharing it will some of my family and friends to show them exactly what I’m doing too!
    Palak Shah Developer from Philadelphia, PA
    Replied 4 months ago
    Thanks @Daniel Somers and good luck!
    Anthony Khan from Philadelphia, Pennsylvania
    Replied 3 months ago
    Keep it up Palak and looking forward to seeing even bigger things from you in the Philly market! We are super proud of you all!
    Palak Shah Developer from Philadelphia, PA
    Replied 3 months ago
    Thank you @anthonyk20.
    Sid Shankar Rental Property Investor from Chicago, IL
    Replied about 2 months ago
    Congratulations Palak did you borrow on a LLC or own name. Difficult to get portfolio lender on llc even on own name it isnt more than 10 doors
    Michael Cook Rental Property Investor from Chattanooga, TN
    Replied about 1 month ago
    Nice article Palak. My wife and I have about $100K of equity in our primary residence and want to access some of that to purchase our first rental. What makes our situation a little more complicated is the fact that we want to move closer to family in the next two years. We're trying to decide between selling and renting closer to work, or using a HELOC or HEL. Any advice on which option would work best? Thanks!
    Marissa Quick
    Replied 27 days ago
    Thank you for this article. Really helpful to see the different options.