How would you use a $50k HELOC?

Question

New member here! The situation: currently own a primary residence with 90k equity, went and opened a brand new shiny HELOC with an available balance of $50,000 at 8% (adjustable so 8% for now).  Savings enough for an emergency fund so really don’t want to touch it. My current P&I is $875 and if I were to rent it in my area for what I have I could seemingly get around $1700-1900.

My question: where would you go from here? Do I attempt to find a suitable BRRR? Do I buy a modestly priced house to live in that needs a little TLC and rent my current house out for cash flow? The multitude of options, the state of market, the current interest rates.  I’m really suffering from analysis paralysis if I’m being honest. I want to make the jump in to my journey to financial freedom but it’s scary especially when you have a family to support.  Appreciate any insightful words of motivation anyone could give, cross posted so sorry if you see this on any other BP communities!

Nathan Gesner · Answer

What is a HELOC? It's an opportunity to borrow money, sort of like a credit card. If you borrow $30,000 to buy a $150,000 house, you're borrowing $150,000 to buy the house and that $30,000 from the HELOC is at a higher interest rate than the $120,000 mortgage on the investment.

I know HELOCs are pushed on the forums, but it's just another way of borrowing money to borrow money. It is just as likely to cause over-leverage and put you in a bad spot. If things don't work out, you could screw up your investment and your personal home.

My preference is to leave the HELOC as your reserve/emergency funding. Save money and use that to purchase property.

Travis Timmons · Answer

Stick that $50k in your back pocket and save it for a time when you need it. You're likely to shoe horn a property into your portfolio that you would not normally buy because that's all that you have. You don't want a 100% financed (partially adjustable rate - on the HELOC funds) that likely does not fit your current buying criteria. Also, depending on your DTI and how much cash you could bring to the closing table, there's a good chance that you cannot use the HELOC funds for a down payment anyway. Your options are VERY limited if all you have is 50k to play with.

I get wanting to get into the next property, but patience and fitting into your buy box needs to take priority.

Clay Smith · Answer

Ultimately, you want to get to a place where you buy the property (all cash, hard money, construction loan) and then finance yourself out to get appraised value. Find someone with grey hair and 100k and start a partnership. Do a deal and see how it goes. Make sure they are financially stable and a good compliment to the way you work. Once you get more experience decide to go at it alone or scale up

Kevin Sobilo · Answer

@Matthew Barbey, time does the heavy lifting. So, as long as you do things that make sense and stick to it investments will improve with time.

That being said, if you aren't averse to moving, buying another primary is awful sweet because you can get better financing on a primary residence. You could do a 5% down conventional loan with PMI and still have money to do some rehab and then rent it out or sell in 2 years for a tax free profit (primary residences don't pay tax on profits up to a certain point).

How would you use a $50k HELOC?

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