Investing in Real Estate Using the Equity in Your Home
What if I told you that you didn't even need to have cash to invest in real estate? With real estate values climbing, and interest rates still near record lows, there has never been a better time to access the equity in your home to create extra income and long term wealth for you and your family.
According to the Federal Reserve the average American has just over 60% equity in their home. Zillow's Median Home Value across America is $226,800. This means that the average American has $136,080 in equity tied up in their home! Obviously these are very general numbers but the point is that many of us have more equity in our homes than we realize.
Home Equity Lines of Credit (HELOC's) are flexible, relatively inexpensive ways to access the equity in your home. They generally attach as second mortgages on your home and most will lend up to a combined 90% on your homes value. From there they are treated much like a credit card, only they do not have cash advance fees and their interest rates are often even lower than your first mortgage.
Now, a lot of people will say that they do not want to go into more debt for anything, no matter what. While this is a safe mindset, these people often miss the difference between "good" debt and "bad" debt.
Bad debt consists of things like credit card debt or auto debt. These types of debt not only cost the initial principal balance you pay for the item you are purchasing, but they also incur the cost of interest carried on the money you borrow, often at very high interest rates.
Good debt is debt that will make the borrower money, including mortgages on rental properties, business lines of credit, and debt used to fund other ventures that are expected to make profit. Good debt takes advantage of a concept called arbitrage.
Arbitrage is the simultaneous purchase and sale of an asset to make a profit. In this case that asset is cash. When we use a HELOC to invest in real estate, we are "purchasing" that cash at an interest rate of somewhere between 3.5-4.5% (As of mid 2019). We are then "selling" that money by investing it at a return higher than the interest rate we are paying on the money.
For example, let's say you have access to $100,000 on your HELOC at 4.5%, and you lend it to a house flipper for 6 months. Using very normal private lending terms, you could make a total of $8,000. Since you are borrowing the money from the bank, you could make a profit of $5,750 after you pay your interest. This could be how you take your family on vacation this year with no earned cash out of your pocket! Do this twice a year and you could easily be making an extra $10,000 a year, all from money that you didn't have to go to work to earn!
Isn't that the dream?
How you use the money on the "sell" side of the arbitrage equation is up to you, but there are plenty of ways to make way more than your HELOC interest rate on the money you "buy" from the bank. If you have questions on what to do on the "sell" side of the equation, feel free to reach out or check out any of the articles and posts on BiggerPockets and other places about lending or investing money.