Vancouver · Member since 2013 · 159 posts · 6 votes
Hi,
I was wondering if it was a good idea to lend money from a HELOC on your primary residence?
My thinking is if I own my primary residence free and clear, I take out a HELOC and use it to invest in lending opportunities when the difference in interest makes it worth it...
Ex: HELOC @ 6% vs. Private Loan @ 12%.
In theory, at least to me, this makes sense. I have tried looking for past threads about this and didn't find much on the lending side of it. Is there any downfall to this strategy?
I could refinance, but I just prefer not to have mortgage payments on my primary residence. Thanks.
I was wondering if it was a good idea to lend money from a HELOC on your primary residence?
My thinking is if I own my primary residence free and clear, I take out a HELOC and use it to invest in lending opportunities when the difference in interest makes it worth it...
Ex: HELOC @ 6% vs. Private Loan @ 12%.
In theory, at least to me, this makes sense. I have tried looking for past threads about this and didn't find much on the lending side of it. Is there any downfall to this strategy?
I could refinance, but I just prefer not to have mortgage payments on my primary residence. Thanks.
It is a source of capital but not without risk.
If you are a lender on a loan that goes bad & you are unable to make the payments on your HELOC you could lose your house in foreclosure.
I am not sure I understand your statement "I prefer not to have mortgage payments on my primary residence". You would have monthly payments when you borrow from your HELOC but not when you aren't using it. The difference with a refi, is that you would be have monthly payments on the proceeds from whether you were using it or not. Another risk to a HELOC is banks usually reserve the right to close your line under certain conditions.
Also, you have to consider that HELOC is typically an adjustable rate that can move very quickly against you if you are not careful.
With a straight refi, you have the choice of locking in a longer fixed term. 15-30 years.
Vancouver · Member since 2013 · 159 posts · 6 votes
13y
@Jeff S. Looks like I have a lot of reading/studying to do in the next little while! Before, I relied on Amazon's book reviews to figure out what books to buy... Needless to say, having recommendations from people like yourself and many others who have 'walked the walk' is a lot better.
I do agree with having short-term investments from the HELOC. Also, since I know nothing about them, what type of returns should a note generate? You mentioned the return could be higher than a rehab loan.. So I'm guessing better than a mid-teen return?
@Steven Hamilton II
Thanks for you response, I know you contribute a lot to this site.
So, if profit split comes through my entity it's ordinary income thus subject to SS, FICA tax where if it comes to me personally it is interest income thus not subject to those taxes? ... sounds bad.
Thanks for you response, I know you contribute a lot to this site.
Not necessarily. You have to pay yourself a REASONABLE salary. If it is not entirely passive then a salary may be needed. That could be based upon your actual time involved at $X per hour. If it is passive, I would not be worried about a salary.
If you already have a corporation and use that to make your investment it would be taxed as interest.
I do agree with having short-term investments from the HELOC. Also, since I know nothing about them, what type of returns should a note generate? You mentioned the return could be higher than a rehab loan.. So I'm guessing better than a mid-teen return?
No, rehabs loans are mid-to-high teens or more, depending upon how fast you get paid back. The best person to add to this about other type of notes is @Ellis San Jose . Ellis?
There is no definitive answer as to what yield a certain type of loan or note "should" generate.
There are so many factors that influence yield. Risk, term, collateral, timing etc. The MOST influential factor is the lenders/investors ability to increase yield or reduce risk.
I caution investors not to chase yield especially if your risk goes up significantly reaching for a few extra percentage points. Even more so if you don't know how to mitigate the risk. Investing in a 20% note doesn't do you any good if you never actually receive it, or worse, lose your principal.
I have invested in so many different types of paper, from performing residential loans, residential non-performing loans, performing commercial loans, equity participation notes, mobile home notes & judgments. I am a little bit different because I am a very active investor, & very comfortable in figuring out weird situations.
Keep it simple in the beginning & stick to notes that you can easily understand.
If get the proper education, do the due diligence, & get the legal expertise you will be on your way.
Real Estate Lender · New York City, NY · Member since 2011 · 54 posts · 30 votes
11y
I know this is an old thread, but it's an excellent thread. One of the best on BiggerPockets.
Here's what I have been doing this last few years :
1)I got a HELOC from TDBank in 2010 for Prime -.5 (today the rate is 2.75%).
&
2)I got a Portfolio Line of Credit at Wells Fargo (this is a bit more complicated than a HELOC but it is a similar idea. Instead of the collateral being against a home, it is against a portfolio). My rate on this line of credit is Prime ( 3.25%). But, the more money you have in the account, the lower the rate goes. So if I grow my money over the next few years and I can add it to this portfolio account, then I can get rates that are Prime - 1% or even Prime - 1.5%. This might come in handy in the next few years as interest rates move up.
I use these 2 different lines of credit too lend money. I generally get between 15-17% on my hard money loans.
This is smart business. The risks were well-stated in the previous posts. But, if you are disciplined, do your due diligence, and always have some extra cash on the side in case of an emergency, than I think this is an excellent approach to grow your wealth.
Rental Property Investor · Brooklyn, NY · Member since 2011 · 76 posts · 17 votes
10y
Hey David Ackerman , thanks for your reply to this post. I'm looking into doing the same thing except I'm using personal cash and an LOC from a rental propery I have. Can I ask if you use a broker, and where you found them? I'm diving into some books right now, but this is where I'm getting held up. Do you do more than 4 loans a year?