How amazing would it be to be able to invest your Home Equity Line of Credit (HELOC) into a Real Estate deal to gain an equity position without having to pay out of pocket to cover the interest?
First off, what is a Home Equity Line of Credit?
Also known as a HELOC, and not to be confused with a "Personal Line of Credit" or "Unsecured Line of Credit", a HELOC is secured against the equity in your home, and as such it typically has a more favorable interest rate than its unsecured counterpart.
This strategy was recently introduced to me by a fellow real estate investor, and I just thought it was absolutely brilliant. What I have noticed is that people want to use the equity they've built in their homes/properties to invest.
Now, before I go any further, I want to outline two different ways that you could tap into the equity in your property:
The first option is to refinance and pull that equity out. Right now in the landscape that we're in, interest rates are high and people aren't really wanting to refinance.
The second option is to get a HELOC.
For the purposes of this post, I'm going to focus on the second option. As you can imagine, when you use a line of credit, you have to start paying interest on what you're using. As such, most people will simply use their HELOC to do private lending because they're able to get a fixed return which covers the interest payments, and basically live in the spread with whatever money they're making on the private lending deal minus their interest payments for their HELOC.
You might be thinking, what's the Problem?
The problem is that a lot of people want to use their HELOC to gain an equity position in the property that they're investing in. This means they are actually gaining part ownership of the property. Often what happens though, is the cash flow doesn't quite cover the interest that they're having to pay. With buy and hold and with an equity position, a lot of the returns that you're getting are on paper, and aren't necessarily paid out every month because the majority of the return is in the appreciation and the mortgage paydown. So, this makes it tough for people to use their HELOC, especially if they can't pay out of pocket to cover the interest until they get their capital back.
So how do we fix this problem?
You can use part of your HELOC as a private lend and then use the other part and put that towards an investment for an equity position in a property. I'll give you an example:
Let's say you have $100,000 available in a HELOC and your interest rate is at 6%. What you can do is lend out $50,000 at 12% (or more). Which is double the interest rate that you're paying on your HELOC. Then you use your other $50,000 to invest for equity in a property. And what that allows you to do is take the the payments on your first $50,000 that is in a private lending deal and use that to cover the interest for both sets of $50,000 and now you're not having to pay out of pocket for the $50,000 that's invested in an equity position. You can even do something where you're lending at a higher rate depending on what type of investment it is, and depending on your risk appetite.
The one thing I do recommend though, if you are going to do any private lending with your HELOC, is to make sure that it's secured against the property. So when you're investing with any line of credit, look for opportunities where your investment is secured against the property and that the loan to value isn't too high because you want to make sure that investment is safe. Remember, you have borrowed these funds to invest with - so ultimately you're responsible for making the interest payments.
I hope this helps. When this strategy was introduced to me, I thought it was absolutely brilliant and it's now something that I'm talking to my investors about and had to share with our followers. As always, if you have any questions or if you want to implement this strategy please feel free to reach out to us. And if you're not already, make sure you subscribe using the form at the bottom of this page. Until next time.
Quick Disclaimer: I am not a financial advisor, lawyer, or accountant. So, if you do plan on investing in real estate, make sure that you speak with the real estate focused professionals in your life before you move forward with any investments.
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