Increased Equity Now What?

Question

Hi All. As houses have increased in equity, what are the positives and negatives

of getting a credit line in that equity for a next purchase? Aside higher volatile interest rates, what else to be cautious about?

John Warren · Answer

@Alfredo Coria yes a HELOC is most definitely more debt, but the goal here is to bring in more rental revenue as well. One of the key things you have to check on as you grow a portfolio is that lenders are counting the rental income correctly. I ran into this a lot early on when I was investing solely in residential rentals. I had a lender tell me my debt to income was bad and that I couldn't get a loan. When I dug in, I realized that they had mistakenly added the debt but had added zero income back from the property!

I would use a HELOC as a down payment for sure if it adds to your overall cash flow. Even if you are paying 3, 4 or 5% interest on your own equity, if you can generate a much higher return (10-15%?) then it totally makes sense to get the equity working for you. The other thing is that your equity in your home always becomes less valuable/effective over time. If you can buy another property, that second property also has a chance to appreciate which is what so many people don't realize.

Alfredo Coria · Answer

@John Warren

Alfredo Coria · Answer

@John Warren thanks for the insight. Would a line of credit be seen as a debt when the underwriter is reviewing your finances? If yes, would that limit the cost of a home one can buy? I see the line of credit as beneficial when it is big enough to cover the full price of a home---thoughts? Otherwise, you would be adding more debt and hence less power to purchase a property, right? Also, I also see it beneficial if the line of credit is big enough to ensure a 20% down payment and hence not paying the PMI insurance; if this is the case, then the balance act is whether the higher interest rates are less than the PMI and mtg payment, but no one really knows what the future interest rates would be, so here is the uncertainty.  Ultimately the benefit of the credit line would be purchasing a second property, lower mtg payment, no PMI in exchange of another debt which interest rates will only increase through time...is this the right reasoning or did I miss the mark?

John Warren · Answer

@Alfredo Coria there is really no down side to a HELOC. The nice thing about lines of credit is that you are not charged interest until you draw on them so there really is not down side. Also, they are typically interest only which is awesome when you are building your portfolio. I have used lines of credit as down payments on properties before, and I also have used lines of credit many times to help me through periods of construction where costs over ran. I did one project in Cicero, IL where we ran into trouble with the boiler and we had to re pipe quite a bit of the building. The HELOC definitely came in handy!