I live in Orlando, FL and currently in contract on my first section-8 property in Birmingham, AL. So far, the process has been great. I am looking to potentially tap into my primary home equity (About $160k), and use that to purchase a second investment property in Birmingham (Cost and rehab), to help scale quicker.
I have a few questions and hoping and veteran can help a rookie out here.
1. Is this something worth doing?
2. If so, should I continue to buy properties using the same initial HELOC funds after doing a cash out refinance or just pay the HELOC off?
I understand there is a risk in everything we do in real estate, and this is no different. I am just looking for advice and any suggestions on how or if I should proceed with this strategy.
1. Yes this is definitely something worth doing. Or in other words, using a HELOC to buy an investment property is a great plan. The biggest downside right now is that rates are very high. HELOCs are typically tied to the WSJ prime rate. Which is 8.25% today.
2. Yes if you can pay down the HELOC you then can reuse those funds for the next property. The draw period on HELOC's is typically 10 years. Meaning you can continue this strategy for 10 years before your HELOC is locked and you go into a repayment period.
The first category of investable funds includes "lazy debt equity" in your home, followed by retirement plan funds such as 401(k)s, IRAs, and other investments. The primary focus should be on utilizing the home equity in their primary residence. This equity can be accessed through three main options: a home equity line of credit (HELOC), a cash-out refinance, or selling the property and potentially transitioning to renting.
The HELOC is an attractive option as it incurs minimal fees and only charges interest on the drawn amount. However, it may not grant access to the entire equity of the house. Nonetheless, it serves as a convenient starting point for most investors, allowing them to begin investing within a few weeks. As investors progress, they may eventually exhaust the potential of the HELOC and consider a cash-out refinance, which provides access to a greater portion of the home equity. It's worth noting that cash-out refinances involve associated fees, and some mortgage lenders may increase interest rates to compensate. As a last resort, selling the house and transitioning to renting can be considered, but this is generally a drastic measure.