Using a HELOC to become a PML

[Cory Berrang]

I am loving all of the knowledge everyone has here and from other avenues. I am in a position where i can have a substantial HELOC to have on standby. Initially i was thinking of using it for the BRRRR method. From what i have researched, apparently it is pretty common. I recently dug deeper into private money lending and something piqued my interest. The idea of using my HELOC to become a private money lender. I understand this can depend on what my rate is for the HELOC at the time (can change monthly), but if offset by the agreed upon interest rate regardless of 1st or 2nd position lender, is this possible? I of course do not want to jump into anything so i assure you all this isn't "on the fence" post, and what you say is what ill do haha. I am just curious is lenders have done it this way. I hope everyone gets all the homeruns they needed this month!

[Jeff S.]

This was practical when HELOC rates were at 4% @Cory Berrang, but it’s not practical now. Do the math. If your HELOC is at an 8% rate and you lend the money at 11% plus a few points per year, that’s a 5% annualized spread. If you are in the 40% tax bracket, it will leave you with around a 3% net return. This assumes you are loaned out 100% of the time, which is impossible.

You can currently exceed a 4% return in a US Treasury money market fund that is deferred from state taxes. Plus, consider the risk.

What would happen if your borrower doesn't pay? Assuming your HELOC is against your personal residence, you risk losing your family's house. Unless you have the funds to repay the HELOC (in which case, why aren't those funds loaned out too?), how would you cover a borrower default? Could you do this before your HELOC lender completes a foreclosure? I find this risky and potentially unfair to your family. But that's me. Second-position loans only compound the risk.

Tempting as they might be because they tend to be for relatively low dollars, second-position loans are about as risky as they get. I know a small handful of lenders who specialize in these because they have the experience and wherewithal to withstand getting wiped out on occasion. Unless you have the background and can specialize too, these are not something you should get into. Even many of the largest hard money lenders don’t make second-position loans.

While HELOCs always seem appealing, since you feel the untapped money is burning a hole in your pocket, the current returns from private lending using a HELOC are not worth the risks.@Cory Berrang