How to Use a HELOC to Invest in Real Estate
Many investors choose to tap into the equity of their primary home to help finance some or all of their investment purchases.
A HELOC (Home Equity Line Of Credit) is secured by the equity on your home. Many lenders will offer a HELOC of up to 90% of your home’s equity. Since a HELOC is a line of credit, this means it is like a revolving checking account where you will only pay interest on the amount that you use.
First off, let’s go over how to calculate the equity in your home:
If you have a primary residence that is currently worth $500,000, but have a mortgage balance of $300,000. You simply take the Market Value of the house Minus the debt on the house.
In this scenario, the equity you have in your primary residence is $200,000. Most banks can lend between 75-90% of the equity of your home on a HELOC. In this case, assuming that the lender can lend 90% of the home’s equity, you can tap into $180,000 of your home’s equity for any investment purchases.
Most banks do NOT charge a fee for opening a HELOC. Some banks do charge a fee to send an appraiser out while others will waive the fee.
A bank’s HELOC is normally revolving for 20 years, meaning you are able to use the same initial funds for a period of 20 years before the HELOC closes. The funds that you use are then charged a fixed or variable interest rate. Currently, interest rates are around Prime, which at the time of this article is 5.5%. Most lenders will offer an introductory fixed interest rate for the first year, while others will offer a variable interest rate.
"A bank’s HELOC is normally revolving for 20 years, meaning you are able to use the same initial funds for a period of 20 years before the HELOC closes"
How to use a HELOC to fund your next BRRRR or Flip Investment Project:
Assuming that you find a property that cost $40,000 to purchase and $20,000 to rehab, your initial investment (minus any holding cost) is $60,000. Once you have secured a HELOC, you will then transfer $60,000 of the funds from your HELOC into your checking account to purchase your investment.
"A BRRRR project is an investment project where you (B)uy a distressed property for cash and (R)ehab it to increase it’s value, then (R) ent it out for cash flow, and lastly do a cash out (R)efinance to pull all the cash back out to (R)epeat the process all over again"
Fast forward 6 months later, when you have either sold your flip or cashed out refinanced your BRRRR project - you will take the funds and pay back your HELOC.
Remember that during this 6 month period, you will be responsible for paying monthly interest payments towards your HELOC for the borrowed funds.
Assuming a fixed interest rate of 4% APR on a $60,000 HELOC draw, you will have paid with your own cash $1200 ($200 monthly interest payment x 6 months).
In summary, if your flip generated enough profit or if your BRRRR appraised high enough, you may be able to pay back the entire HELOC with all your profits, as well as have enough profit left over to cover the 6 months of HELOC interest only payments! Which means, you have bought this investment property with essentially zero of your own money. That is the power of leveraging debt to work for you!
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