Is using home equity to purchase real estate a good idea?

8 Replies

I live in the Los Angeles area and housing prices are through the roof.  Does it make sense to use home equity to buy

rental property? If not, is going out of state a viable option?

@Richard in the past 2 years, using HE made it possible for me to buy an auction sale (full cash 24 hours) and an estate sale (seller took my cash offer rather than any of the 6 other offers). Plan to sell one this year and the other next year. Net out for the 2 somewhere in the 150-160 range. 

It's definitely a viable option...it's all I've ever done and I know a lot of other CA folks that do it too. 

Using home equity is certainly an option, and a great way to snowball profits, but you have to do it in a way that the numbers work out. Like, the interest you pay on the home equity loan needs to be less than the returns you are receiving on the property you are buying, or you're losing. So just work the numbers as concretely as possible. If that shakes out, then yes, great option.

As long as the numbers work out, it doesn't matter where the money is coming from as long as you are still getting the profit/cap rate you are looking when taking into account the interest on the HELOC. I've even used balance transfers on credit card promotional offers of 2%-3% to get cash on some deals. At the end of the day, it just a numbers game.

Pull the equity out ASAP and let it “season” in your bank account.
Try to think ahead when buying your next investment property.
Get your DTI in order, make sure to have over $50k in available credit (helps your score) etc.

Jim Watson, that is great! Did you purchase to flip

Justen, sorry to ask this question but what does it mean to "season" the home equity money?

You don’t need to season cash if you put the cash in an LLC and let the llc buy properties.

I just purchased a 2 family using a HELOC on my primary residence. I didn't need to pull the money out to season- my HELOC statement showed the cash I have available - like a bank statement. Once you pull it out you start paying interest so I didn't want to do that either. My mortgage broker used my HELOC statement to show cash that I would bring to the closing table. Seasoning it wasn't an issue in CT in this case.

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