HELOC on primary residence to invest?

Question

So I am getting closer to jump in with my first investment.  I have cash ready to go but I also have the option to pull out a significant amount of equity from my primary residence by using a HELOC.  My question, is it a terrible idea to use a HELOC on 1st as money to invest?

The way I understand it is owning a home is a forced savings account.  I'd rather take out that money and put it to work...

PS:  The HELOC rate is 3.25%

Thank you

-Derek

Chris Salerno · Answer

In my opinion, I would invest the funds into multi-family syndication. You will receive huge tax benefits and larger returns depending on the syndicator you are working with. You can also invest your 401k and IRA into real estate which a lot of people don't know that.

Looking forward to your success.

Emma Powell · Answer

We are huge fans of the HELOC to fund investments and put a 1st lien HELOC on our primary home as well as one rental home that we use as our "sweep accounts" for personal finance and the business. Everything else has mortgages for now. I borrowed from the rental HELOC to be the earnest money partner on a small apartment syndication I am sponsoring, as well as to BRRR a few smaller properties as sole owner this year. It's been great.

I'd say our only concern is the added risk on the personal home, if you're willing to sell it or house hack if it gets over leveraged. For us, I am always up for moving and love house hacking, so we are using the personal home HELOC to make some improvements to the personal home to put an apartment in and rent it out.

A family member paid off her home, put a 1st lien HELOC on it, planning to pay cash for a rental for speed and ease of transaction, refinance, then recycle the funds acting as her own "hard money" on BRRR projects. Lots of options.

Derek Cirino · Answer

Thanks @Chris Salerno.  That is the plan - to find a solid syndicator or 2 with MF (looking at a few on BP).

Originally got turned on to the whole passive investing from Grant Cardone.  I'm a huge fan of his sales training which carried to his RE and eventually landed me as an interested investor.  The problem is his returns, while very safe, are not juicy enough to get me excited.

Timber Pine · Answer

@Derek Cirino Did you end up investing? It seems reasonable given the low rates and opportunity to get higher returns.

Derek Cirino · Answer

Lots of good advice/info.  Thank you everyone - appreciate it!

John Fortes · Answer

All depends on what your risk tolerance is and if you feel confident in the sponsor you end up investing with.

Now here's one way to tackle it. I don't know how much you have left owed on your home when you receive the HELOC but if you feel good about the investment and the returns and project work out well. You can then turn around and use the HELOC investment to pay down the balance of your mortgage and position yourself to pay off your home.

As always consult with your accountant to see if the tax benefits pertain to you if you invest in a syndication. Also, see if your state qualifies for bonus depreciation.

Charles LeMaire · Answer

@Chris Salerno.   Please explain what benefit you think a non-RE pro gets from $50k or $500k of depreciation (bonus or not), especially on his first deal.  Most of it sits until the prop is sold.  Regards, Charles

Chris Salerno · Answer

@Charles LeMaire

Charles, it depends on the operator and if they are doing bonus depreciation and cost segregation. I know some operators they don’t pass this benefits down to their investor. Every operator runs their own property differently.

Charles LeMaire · Answer

@Chris Salerno - You wrote:In my opinion, I would invest the funds into multi-family syndication. You will receive huge tax benefits and larger returns depending on the syndicator you are working with. You can also invest your 401k and IRA into real estate which a lot of people don't know that.HOLD ON!  Huge Tax Benefits?  On a MF syndication?  Note that Derek says that this is his first deal so he is clearly not a Real Estate Pro.  All of the syndicators love to present the tax benefits of cost segregation to their investors and then say "talk to your account, I'm not a professional".  After about 10 years of passive investing, I have yet to find the Huge Benefits!   Yes, the income during the deal is mostly deferred and the gain is LT Cap Gain, which I happily take, but the big benefits are only for the RE Pros.  Invest IRA money into a syndication: This does not align with the HELOC question, but IRA money can be invested. But there is UBIT & UDFI that almost no one mentions until you've invested.  In the end a portion of your gain is taxable (yes, tax in an IRA - surprise!) relative to the leveraged proportion. BTW, the Solo 401K is said to avoid this.

To be positive, I have average about 30% IRR as a passive investor in MF syndications on the 15 deals that have gone full cycle (started in 2010), so there GOLD in them there hills. The last few years have been great, it is likely to moderate for a while - I don't want to oversell this.

Regards,

Charles LeMaire

Emma Powell · Answer

We are syndicators, eventually I plan to be only passive or KP and work less, so I hear you! You can use the HELOC money to invest however you prefer, lots of options, whether that's a BRRR or as a passive capital partner. Let me know if I can help

HELOC on primary residence to invest?

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