Velocity Banking Question
From what I have seen it seems that velocity Banking is quite controversial.
I understand from a savings aspect that it won't be much of a difference to use a LOC compared to an extra mortgage payment, but is there any legitimacy to the following example:
You paid off the entire balance, now you can use the heloc to buy a cheap rental property. Say it's a 150K limit and you use 50K to outright buy the property and whatever you need for rehab. Repeat the process of paying it off then get another one.
#3 All Forums Contributor
- Investor
- Northern Virginia
@Abner Castaneda
Here is the main Cruz of “velocity banking” and some of these other programs.
They never ever compare apples to apples.
Let’s say you have a line of credit at 4% and take $50k to buy a home. Then you make extra payments to pay down a 4% loan.
If you took that money and invested it and earned 8% which is better?
IMO, using leverage is a matter of timing when you want the income from a portfolio.
For example, the more leverage you use, the more your returns will be (assuming you hold long enough to even out fluctuations) because appreciation on your leveraged property will usually provide more wealth than any other element in real estate investing. If you put 10% down on a property, and it appreciates by 10% (let's say in 2 or 3 years), you've doubled your wealth. You'll probably have to subtract from that gain some negative cash flow (10% down may make cash flow off the bat tough), and you can add some back in for tax benefits and debt reduction, but the wealth on your balance sheet grows fastest this way.
This is not to say 10% down and negative cash flow is good. I'm just saying that leverage and appreciation are the source of most wealth creation in real estate. So if you're aggressively trying to build wealth and you have a steady and healthy source of income in your life, keeping your LTV as high as you can afford without taking uncomfortable risks will build wealth faster.
Someday, however, you'll want to optimize for income. In almost all cases, the best income scenario is a paid-off property. Your overall returns will be less because the leverage is gone, but that will matter less when you're most interested in receiving monthly checks.
So often people get excited when they achieve some nice cash flow from a property they purchased a few years ago, and their instincts tell them to leave that alone. Of course, if they need the income, that is exactly what they should do.
But if they don't need the income anytime soon, they should probably use that "stale equity", raise the LTV on that property with a refi or LOC, and go acquire more.
If they do this, they will give up that $1000/mo (more or less), but they'll have two properties, and the income when they do need it will be much higher than it would have been otherwise.
#4 All Forums Contributor
- Plymouth, MI
Let me get this straight. You're asking if it is better to either:
1 - Use available cash to pay off a current mortgage, and then leverage your paid for equity (part of it), with the interest charge, to now buy another property...or,...
2 - Use that same exact cash you would use to payoff that mortgage, to buy another property, realizing that this cash you would be using to buy this property, in this case, is FREE,...and you can use all of it instead of part of it.
#1 Innovative Strategies Contributor
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- The Woodlands, TX
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#1 Innovative Strategies Contributor
- Lender
- The Woodlands, TX
The reason people are always confused about how velocity banking works is that intuitive reasoning says it’s bs; you know, because it IS bs. LOL
#4 All Forums Contributor
- Plymouth, MI
Quote from @Don Konipol:
The reason people are always confused about how velocity banking works is that intuitive reasoning says it’s bs; you know, because it IS bs. LOL
No it isn't. The reason why people don't understand it is because they don't know how to execute it.
We use velocity banking and love it. But we use it differently than 99% of other people.
We took out a HELOC, put money down on the principal, then REFINANCED the HELOC and used that to buy investment properties.
Using this strategy, we were able to get into 5 apartment syndications in 18 months.
If used properly, velocity banking is amazing to scale.
We will have our home paid off in less than 4 years from when we started.
We will then get a 1st lien HELOC to scale even faster.
Quote from @Charlie Hardage:
We use velocity banking and love it. But we use it differently than 99% of other people.
We took out a HELOC, put money down on the principal, then REFINANCED the HELOC and used that to buy investment properties.
Using this strategy, we were able to get into 5 apartment syndications in 18 months.
If used properly, velocity banking is amazing to scale.
We will have our home paid off in less than 4 years from when we started.
We will then get a 1st lien HELOC to scale even faster.
That is interesting. I'm curious as to why you decided to do it like this and not start off with the 1st lien as so many gurus preach?
#1 We have a great interest rate, 3.125%.
#2 We use a local credit union that was much more flexible in terms (intro rate and 100% LTV).
Eventually we will use a 1st Lien HELOC but it didn't make sense at the beginning.
This credit union does have a max limit, I don't remember the amount. We will look at 1st lien in the next couple of years when rates come down a bit.
Quote from @Charlie Hardage:
#1 We have a great interest rate, 3.125%.
#2 We use a local credit union that was much more flexible in terms (intro rate and 100% LTV).
Eventually we will use a 1st Lien HELOC but it didn't make sense at the beginning.
This credit union does have a max limit, I don't remember the amount. We will look at 1st lien in the next couple of years when rates come down a bit.
Awesome, thanks for the info. Don't wanna bother you too much with questions, but is it fairly simple to get this set up? I've read that it can get complicated or messy if you don't set this up the right way so I was thinking going with help from someone like the Kwak Brothers from Accelerated Banking.
@Joe Villeneuve, how does one execute velocity banking in the proper way? I'm an old dog who wants to learn a new trick. :D
Velocity Banking is a completely different way of thinking and using your money.
It's a way to pay down your mortgage and debt using a line of credit.
You put a 'chunk' of money down on the principal of your mortgage and all of your income is used to pay down the line of credit as opposed to putting it in a checking or savings account.
Let's say you want to pay down $25k of your mortgage, you have 3 options.
1) Pay your regular monhtly mortgage payment
2) Put extra principal each month on your mortgage
3) You take $25k from a line of credit and put it on your mortgage
In my case:
Option 1 would have taken about 4 years to pay off $25k in principal.
Option 2 would have taken about 6 months.
Option 3 took 5 minutes.
With Option 3, it took me about 6 months to pay off the HELOC, except I will pay less interest on my home than Option 1 or 2. Yes, I am paying interest on the HELOC but that is still less interest I will pay than the other 2 options.
In addition, I use my HELOC to invest in real estate. If I went with option 2, I would not have additional money to invest in real estate because it would all be going to my mortgage.
#4 All Forums Contributor
- Plymouth, MI
Quote from @Kerry Baird:
@Joe Villeneuve, how does one execute velocity banking in the proper way? I'm an old dog who wants to learn a new trick. :D
The principle behind VB is to keep your cash moving forward. There are a number of ways to do this. None of them involve paying down debt since the build up of equity is defeating the purpose. Equity is a form of cash that is frozen, stationary, and thus useless. That equity must be moving forward, meaning you have to access it (I describe it as "melting" it), and move what you've gained access to forward.
The best way to do this, is to sell the property, take the equity/cash, and use it as a 20% DP on the next property, or set of properties. Here's the basic math behind it, and why VB works so well:
1 - When you buy a property, using cash for a 20% DP, you are buying a property worth 5 times what you paid for it. Make no mistake, if you have positive CF, the DP (and any other cash you put into the property as you own it), is the total cost to the investor. The tenant is paying the rest.
2 - If the PV goes up, the equity goes up equally, dollar for dollar. This dilutes the value of your equity, and increases the cost of your property. In a very real sense, the equity is what you are paying for the property.
3 - If you sell the property, and gain access to that equity, you can turn the buying power of that equity/cash back to a 5 to 1 ratio...and, your cash flow will increase dramatically since you are buying more property.
Example:
1 - Buy a $100k property with a 20% ($20k) DP. The property cash flow, so unless you have to add more cash into the property at some point (this includes the foolish idea of the REI using their money to pay down the mortgage), this property costs the REI $20k.
2 - This means the equity in the property upon purchase is $20k,...which you paid for.
3 - The property value increases $20k, now $120k, and the equity also increases $20k, to $40k. Sounds good, right? What if the PV increased $40k to $140k, and thus the equity increases to $60k? Sounds even better, right?...and you're losing money.
4 - Why? The equity now is $60k, on a property worth $140k...that means you're paying $60k for a property that is only worth 2.33 times what the equity (you) is paying for it. Remember, when you bought the property, it was 5 times what you paid for it (the DP).
5 - Now, access that cash/equity buy selling the property (NEVER fall in love with a property or tenant. Fall in love with the money. You're an investor, a money collector, not a property collector). Take that now liquid cash, and use it as a 20% DP on your next property (or set of properties). This buys you a new PV of 5 times that DP, or $300k,...not just $140k. OK. Before someone mentions all the closing costs, remember your monthly payments (thank-you tenant) is also buying down the debt, and building added equity...which I'm not using to buy more property in this example.
BONUS: Imagine, if you would, what the added Cash Flow should be by doing this.
Quote from @Don Konipol:
The reason people are always confused about how velocity banking works is that intuitive reasoning says it’s bs; you know, because it IS bs. LOL
Don, the confusion is a feature not a bug. The pitch relies on folks feeling like they have gotten access to some special dark magic which allows them get one over on the man and/or feel superior to others who "Don't get it".
Understanding the mechanics would undermine the main reason people do it/ talk about it: to feel special.