How to use a HELOC to start investment journey
Member since 2022 · 1 post · 0 votes
Hello, I'm looking to get started in real estate investing. I currently own a property that is valued at 850K and my current loan on my mortgage is 272k. I'm considering getting a home equity line of credit (HELOC) of 250k-320k to begin my real estate investment journey. What is the best method you would advise me to use this HELOC to get started? TIA
Hello, I'm looking to get started in real estate investing. I currently own a property that is valued at 850K and my current loan on my mortgage is 272k. I'm considering getting a home equity line of credit (HELOC) of 250k-320k to begin my real estate investment journey. What is the best method you would advise me to use this HELOC to get started? TIA
You’re fortunate to have a lot of equity in your home, and there may be some great opportunities ahead for you. Given the amount of money you’re considering putting into play and the fact that your personal home would be at risk, I will add some strong cautions about the heloc in addition to offering some suggestions for how to use it. Perhaps this information will help future readers if you already know and are prepared for these risks.
Helocs are almost always at variable rates, and interest rates are likely to go pretty high in this economic environment. So, if it’s possible to leverage your heloc for shorter-term projects (brrrr strategy, for instance) rather than for a longer-term investment, that could be wise. Of course, some of the short-term strategies (like brrrr or fix and flip) are risky right now too since housing prices may become unpredictable soon. You’ll want to look at the risks on both sides of that equation, and the best advice I can possibly give is to be sure you have plenty of meat on the bone for whatever deal you find so that there’s always an exit strategy.
Beware that if a heloc gets to 10%+ (which looks more possible than it once did), your monthly payment on a fully-extended interest-only loan at the max borrowing amount you described above would be $2667. If you have the means to cover that payment for an extended time, then you may also be positioned well to buy properties if the housing market corrects (which appears to be very possible in the next year, even if not certain).
If you’re not in a position to cover those payments (either through other income or with heloc proceeds themselves, set aside for reserves), then I would definitely not use your heloc for anything long-term.
In all cases, but particularly if you’re going to rely upon the heloc as a source of reserves, beware that helocs can be frozen and sometimes called due immediately if the bank so chooses in an economic downturn (note that this may impact your cash reserve position if you plan to depend upon the heloc for reserves). Read your closing docs carefully and ask good questions. Sometimes, they also require periodic re-verification of your ability to pay, which is when they may be most likely to be called or frozen.
If interest rates get as high as they did in the early 80’s (which seems a less ridiculous possibility now than it did 6 months ago), you can expect to nearly double the monthly payment above.
Finally, if you're planning to leverage properties you buy, your heloc (at the adjusted rate) will factor into your DTI for borrowing on new properties. A HE loan would be a good option for a fixed rate, but it's sure to be at a higher monthly payment than a current heloc (but perhaps a good bit less than a future payment on a variable rate).
I’m actually not suggesting that you shouldn’t use a Heloc in this environment (I use one!)—only that the type of investment and risk should be very carefully measured (and especially if you lack significant cash reserves to weather a storm).
Again, you have quite an opportunity to do something with that amount of cash; I’d just start slowly and educate yourself at every step of the way. Assuming you understand and have a game plan for the risks, then go for it!
Hello, I'm looking to get started in real estate investing. I currently own a property that is valued at 850K and my current loan on my mortgage is 272k. I'm considering getting a home equity line of credit (HELOC) of 250k-320k to begin my real estate investment journey. What is the best method you would advise me to use this HELOC to get started? TIA
You’re fortunate to have a lot of equity in your home, and there may be some great opportunities ahead for you. Given the amount of money you’re considering putting into play and the fact that your personal home would be at risk, I will add some strong cautions about the heloc in addition to offering some suggestions for how to use it. Perhaps this information will help future readers if you already know and are prepared for these risks.
Helocs are almost always at variable rates, and interest rates are likely to go pretty high in this economic environment. So, if it’s possible to leverage your heloc for shorter-term projects (brrrr strategy, for instance) rather than for a longer-term investment, that could be wise. Of course, some of the short-term strategies (like brrrr or fix and flip) are risky right now too since housing prices may become unpredictable soon. You’ll want to look at the risks on both sides of that equation, and the best advice I can possibly give is to be sure you have plenty of meat on the bone for whatever deal you find so that there’s always an exit strategy.
Beware that if a heloc gets to 10%+ (which looks more possible than it once did), your monthly payment on a fully-extended interest-only loan at the max borrowing amount you described above would be $2667. If you have the means to cover that payment for an extended time, then you may also be positioned well to buy properties if the housing market corrects (which appears to be very possible in the next year, even if not certain).
If you’re not in a position to cover those payments (either through other income or with heloc proceeds themselves, set aside for reserves), then I would definitely not use your heloc for anything long-term.
In all cases, but particularly if you’re going to rely upon the heloc as a source of reserves, beware that helocs can be frozen and sometimes called due immediately if the bank so chooses in an economic downturn (note that this may impact your cash reserve position if you plan to depend upon the heloc for reserves). Read your closing docs carefully and ask good questions. Sometimes, they also require periodic re-verification of your ability to pay, which is when they may be most likely to be called or frozen.
If interest rates get as high as they did in the early 80’s (which seems a less ridiculous possibility now than it did 6 months ago), you can expect to nearly double the monthly payment above.
Finally, if you're planning to leverage properties you buy, your heloc (at the adjusted rate) will factor into your DTI for borrowing on new properties. A HE loan would be a good option for a fixed rate, but it's sure to be at a higher monthly payment than a current heloc (but perhaps a good bit less than a future payment on a variable rate).
I’m actually not suggesting that you shouldn’t use a Heloc in this environment (I use one!)—only that the type of investment and risk should be very carefully measured (and especially if you lack significant cash reserves to weather a storm).
Again, you have quite an opportunity to do something with that amount of cash; I’d just start slowly and educate yourself at every step of the way. Assuming you understand and have a game plan for the risks, then go for it!
First of all, when using equity in your home be very careful and start slow. If you are just starting out, start small. Make your education cheap. Even with a property valued at 100k - to close on 80% debt will cost you 25K. You can eat up the equity in your home fast if things go wrong.
I'd take maybe 75K out and and look at a purchase price of 250k that needs 40-50k work and has an ARV of 375k+. You'd have a loan amount of 250k: 200k toward purchase and the 50k rehab. You'd put down 50k toward purchase and pay 5k in orgination fees. But when you sell for 375k you pay off the 250k loan and the 55k back to your HELOC and you have 70K in profit and I'd use that money going forward, not your HELOC. Always better to play with the house's money.
Hi everyone,
I'm in the same boat as @Oscar Vazquez.
I generally proceed with caution so I'm trying to get educated on everything I can so I can start my investment journey.
@Mike Klarman I have a couple of follow-up questions based on your example above:
1. The 75k is taken out from the HELOC? Did you mean 55k?
2. As mentioned, I am new to this and trying to understand concepts. I understand the ARV, but is that something that I need to hire an appraiser for to do on a potential property? Or, are their search engines that I can look into that would give me this kind of information?
TIA