Home equity questions

7 Replies

The home we live in has appreciated significantly since we bought it 4 years ago. At 85% of our ltv we would have just over $80k to work with. I am actively looking for my first real estate investment opportunity but have no cash and nothing extra to be able to carry any monthly payments. Is it a good idea to leverage the equity in our home to get started? Pros and cons?

Hello and welcome to the Forum Taylor! Even though you have a decent dollar amount it won't matter with most Banks. They might do it at 80% but I would not guarantee it. Your amount may not consider all the closing costs or fees charged. No, its not a good way to start but it is a way if you can convince a bank, especially a local one. It might be easier to get a HELOC loan or a credit card with a special rate for opening a new account but you must be disciplined and pay it down quickly.

Where did you get the current home value?  Are they reliable?  There are not any pros I can think of.  If you find a good deal try a hard money lender.  There is always a way you might get owner financing but it might take some creativity to make both sides happy.  Like them 2 loans that includes a down payment amount they need.  No one knows what the future holds.

Good luck to you!

I would not be comfortable levering 85% of my home's equity. The highest I would go is probably 60% so in your case that would not get you much. Even a LOC, 80k won't be enough to buy an rehab anything decent in most parts of the US. You could use it as a down payment on a HML but then you are leveraging leverage and with no experience that is very risky. Since you have little money I would focus on finding partners who you could work with so you can learn the business a little better before risking you home.

You can think of a HELOC as a credit card with exceptional interest rates. I think the risk of using it comes down to your time horizon (due to the variable nature of the product), and the ROI using the interest you are paying as part of the calculation.

If you are using the HELOC to BRRRR or Flip, I think it is an excellent way to get started because your payback time horizon is relatively short. I wouldn't expect interest rates to raise more than 2% per year and there is probably some sort of max increase clause in your product. Banks' terms will vary.

Additionally, I would "season" the money needed from your HELOC in your checking account for at least 2 months if you want to get a conventional loan and look at it as part of your holding costs.

@Taylor Colwell Run the numbers for what you are trying to do, and know where your risk/comfort level is. If you want to tap your equity, a cashout refi that stretches your loan term back to 30 years might improve your monthly cash flow and retrieve the equity. Of course, you need to consider your ability to weather the storms of life. I miss Belton. People in DC have a different culture about them. And the brisket in Belton was sooooo tasty. Don’t be a motivated buyer. If you cash out, and use it on the right property, maybe a 203b with rehab financed into the loan could be used. That’s 80K for a down payment, a rehab financed into the purchase loan, and the potential to refi that next property to again leverage equity even if you have to wait a year or two for appreciation. Disclaimer: it costs more and takes longer to fix it than you plan so leave a buffer, and appreciation is not guaranteed, and life gives you what you get.

Hello and welcome,

It depends on your willingness to risk. Can you afford the larger mortgage payment? Are you willing to work for it. If so then get a HELOC and start owning rentals.