Investing with a HELOC

[Jim Hewitt]

My wife had an idea to make some money by flipping houses. Using money borrowed through our HELOC she wants to buy a foreclosed house and then fix it up (I'll do the work) and then flip it. I am reluctant to use the equity in our home to do this. Is this a common practice this or is this as risky as I feel it is?

[Mark Yuschak]

This question comes up every now and then around forums.

I'm of the school of thought that using a HELOC is an excellent, inexpensive way to fund a flip. I don't know of any other debt service which is as cheap as a HELOC, and especially at today's rates. Most people are paying prime or prime plus 1 or 2. That's cheap money!

Hard money is not only expensive, it can be time consuming to justify to your lender that you're a good risk. I often equate this to the simple proposition: if you're using hard money to spread the risk, then you must not have confidence in the deal. If you don't have confidence in the deal, what makes you think a HML would have confidence in you or the deal?

Since a HML is expensive (1-2% per month, plus points), why would you want to openly pay more to a HML when you get HELOC money so cheap? Do your due diligence. Be confident in your numbers, spread, and yourself. Fund it yourself and save the hassles, underwriting costs, and time investment. If the numbers don't work, find a better deal. Don't try to drag a HML into it. It will only make the deal more thin!

In my opinion, a hard money lender should primarily be used when all your other capital is tied up yet the deal is so hot that you'll pay expensive rates to make the deal work.