Would you use the equity in your properties to create income

Question

Hello All

I am considering utilizing the equity in my properties that will create enough income to cover the expense of the heloc and make a decent amount of money.

For example my home has $200k available to pull on a heloc, the interest on the heloc I would pay is approx 3.9%, the savings deposit I will place the funds in to will earn me approx 9.9%. I am told it's insured by a bond, it's riskLESS, I will receive a payment quarterly, would have to leave the funds in deposit minimum 3 years.

Keep in mind I can pay off the heloc at anytime earning the full amount. What are your thoughts? Would you use the equity in your properties to create additional income?

Thanks for your response

MarZia

Denise Evans · Answer

A bond earning 9.9% interest is a high risk loan. Otherwise, the borrower would buy cheaper money elsewhere, if it could. If it is paying 9.9%, you have to ask yourself, "Why?" Even if it were a really old bond when rates were high, with current interest rates in recent years, the borrower could have afforded to refinance and pay the defeasance (prepayment) and still come out more cheaply.

Martin Czerwonka · Answer

MarZia,

The only true risk-less or risk-free investment are T-bills, since government can just print more money. Anyone claiming anything else is just trying to sell you and is being unethical in my book. Now, based on their track record they may have never failed to to perform, but past performance is not guarantee for future performance. Always take their track record into consideration but look at each deal separately. Did they tell you what the bond is secured by?

I looked at doing something similar by investing in a deed of trust, since I could choose the property the note was on. The commitment was only 6-12 months not 36 months and it was 9%. On the surface it looked good since I could make a spread of 5.5%, but after calculating income taxes it dropped down to <3.85%. The biggest downfall to me was opportunity cost as I would lose the flexibility of using that principal in other deals, and in this stage of my life it did not make financial sense.

Another thing to consider is interest rates could easily rise over that 3 year period which further erode your projected income.

MarZia RiVera · Answer

Thanks for your thoughts, I am checking into the insurance bond that protects the deposit, says they use the same business practice as Warren Buffet insuring all the deposits.

Levi T. · Answer

Sounds risky. If you can afford the loss, if the 9.9% does not pan out or your money vaporizes into a ponzi scheme or some other scam, then it's alright. If you can't, then you better not do it. I'd say if your asking here, I would not do it.

Would you use the equity in your properties to create income

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