#125 How To Use A HELOC To Invest In Real Estate

Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now, let's get on with the show. Hey, everyone. Hope you're having another great week. By the way, if you hear some background noise, some banging going on, it's because I have some guys on the roof putting in solar as we speak. We're going to talk about that in a future episode. We'll see if it makes sense. I think it does. Well, anyways, excuse the noise. Also, I'm in a really excited mood because in about two weeks from the time I'm recording this, also, you might hear the excitement in my voice. We're about two weeks away from our second ever live pimdcon, which is the Financial Freedom through Real Estate Conference. I'm just excited to meet so many of you to talk real estate, talk life again. We could have just sat home and done this virtually, but we decided to get together and we wanted to do this in person at least once a year. Get to meet people and have a good time. For those of you who can, make it, love to see you there. For those of you who can't, put it on your calendar for next year, well, we don't have a date yet, but we'll get there. Okay, let's get to this week's episode. We're gonna be talking about the topic of HELOCs. H, E L O C. And should you use a HELOC to invest in more real estate? We'll talk about what that is. But I first want to start talking about investing in life. And I know that you'll hear some people say that all debt is bad. You probably know some personalities that might go ahead and say that. And it makes sense because so many of us have felt the burden and the stress that comes along with debt, especially student loan debt, maybe your mortgage. However, I've talked about this before. Not all debt is created equal. I believe that debt, it can be used as a tool to create greater wealth. It can be used for you. Now, of course, this only is true when you use it carefully and wisely. And like, if you think about student loan debt, for example, I mean, I'm sure all of us, we wish we didn't have it. Some of you have probably paid it off, some of you are still working your way through it. But it helped us get where we're at. In fact, it was somewhat of an investment. And without taking that loan, do you think that you would have been able to fund your education, especially your medical education? So, from a financial standpoint, I consider the student loan debt that I accumulated over the years that it was an investment in my future earning potential. Now, don't get me wrong, I know that student loan debt today has gotten out of control, and definitely at its current rate of growth, it's not sustainable. So obviously, I hope for some reform. I know they're talking about some reform in different ways, but let's get back to talking about debt as a tool. Now, one way that some investors, they've used debt to their advantage is to make use of this thing called a HELOC or a home equity line of credit. Now, it's a line of credit that can be used to purchase new investments, anything. It's really cash that you get, and you can make debt work for you. It allows you to use, like, untapped equity that's built up in your home or an existing investment property as collateral against this loan. So, in essence, it's possible to make an investment from using an investment. So as a result, I mean, I know many people think about it and they wonder whether it's a smart decision to utilize this tool. Now, of course, with anything financially related, there are some things to think about. So let's look a little deeper at how utilizing a HELOC might make sense. Now, again, let's start talking about a HELOC again. At its most basic level, it's a line of credit. It's like a credit card. Now, to secure this line of credit, you, you would put up something like your property as collateral. There's also a time limit on how long you can pull that money or use that cash on this line of credit, known as the draw period. The average term to be able to draw this money in and out is actually typically around 10 years. And they also use something, what's called a maximum draw, to determine how much credit you can receive, which is determined by the equity in your property. And this is basically your credit limit, like on a credit card. So, example, if you have about $200,000 in equity in a certain property, your property has gone up in value, and you've got $200,000 of equity in there. You may find a lender that maybe will give you something like a 70% loan of value, which means that they'll give you a line of credit equal to about 70% of that 200,000 or $140,000. So that lump sum, they're going to keep it, you know, allocated to you so that when you want to draw from can be really as simple as, like transferring it online between accounts. Now, we all have online accounts these days. It's easy to transfer money back and forth. It's kind of like doing that with your heloc. And you only pay interest on what the outstanding balance is, like a credit card. The nice thing is that you can use the HELOC for just about anything, from renovations to consolidation. Of course, that's the downside, too. You can use it for just about anything. Then no one asks you what the cash is being drawn for and utilized for. What? Once you fill out the application, once they approve you for it, then that's your money to tap if you need. In fact, you can even use it for a down payment on another property. You might have heard something called a home equity loan or H E L. And many of you might be wondering, like, what's the difference between a home equity loan and a home equity line of credit? I know it took me a while to figure that out. But a home equity loan, sometimes people refer to it as a second mortgage. It's different because instead of drawing from that line of credit source whenever you want, you take the full amount of the loan up front. Then you're paying interest from day one. So instead of having a pool of cash you can draw from, put it back, draw from, pull it back, the home equity loan is really committing to taking that whole entire chunk in the beginning and then starting to pay interest right away. So I know people want to know, why use a heloc? Why would somebody need or want it in the first place? Well, some people like having access to, to the equity in their homes, and they really want access to that cash quickly and on demand. For example, you have your home prices have gone up, meaning that the market value of your home or investment property has gone up. But it's just on paper, you can't do anything with that cash or you can't do anything with that increased value. So a HELOC might actually unlock some of the equity for you to be able to utilize. Now, I've talked in the past how I don't like to really keep a designated emergency fund for various reasons. For the most part, I don't like keeping all that cash on hand. I mean, part of the reason that I feel comfortable doing that is that I've always had like a HELOC in place as a backup to draw from, meaning that if I need to pull money out of the equity of my home. I always had a backup to draw. That's just one reason and one source of emergency funds that I could have access to. And typically I would rather have my money working for me as much as possible instead of just sitting like in an account somewhere. Now, today's climate, today's economic climate's a little bit different. At the time I'm recording this, people saying we're in a recession. So asset values are pretty high. They might be dropping as we speak. And so I have kept a little bit of cash on hand, less as a reserve for emergency fund, but more as, like an opportunistic pile of cash. People, though, have, like, notoriously used HELOCs. People have talked about it to buy cars, upgrade their lifestyle. They've used it to do a ton of renovations, redo the kitchens and things like that. And so they've. In an environment where home prices are rising, that's great. But when the economy and home values, they come crashing down. In the past, many people have had problems really meeting their debt payments. Now they have additional loans on their homes. Their homes are worth less, and so they can't pull more equity out of it. And their homes are used as collateral. And sometimes that would just get. They. The debt would be too much and they would get foreclosed on. So. So utilizing HELOCs, that idea has really gotten a bad reputation in the past. But just like any other tool, any other debt, I think if used wisely, again, it can help accelerate the building of your investment portfolio. So let's talk about some ways it can actually help to do that. Number one, it can help with a down payment. Now, let's say you already own one or two investment properties. You'd like to add more, but you're currently limited by the cash you have on hand. A lot of your capital has gone towards those properties. Well, you could take out a HELOC on one of them, and it's possible that you could use that money to make a down payment on another property. Now, if you're limited by capital or just cash, this would allow you to add even more streams of income. Then you can use cash flow from the investments and your day job to pay off that line of credit. And some people like to do that again and again. Just realize that when you take out more debt, that increases your debt on your books. So it may not always be easy to actually get a loan for the next property. However, I know plenty of people who've been able to do that. They've been able to tap the equity in a property. Mean tap and mean that equity is sitting there. Take that heloc, take out the cash and then put it in a down payment for the next property. What else can you do with it? You can purchase a property in cash because a HELOC is so accessible and it's possible that it can help you purchase an investment property quickly and in cash. For example, we talked about that other home equity line of credit where you had $140,000. Again, depending on where you buy a home or the investment property, that might help you buy a property all in cash. You could take out a loan again on the backside once you've secured the property and then pay off that HELOC immediately. Again, these are some more advanced things that people tend to do, but they might use that quick access to cash to buy that property in cash and secure it and then figure out the loan on the backside and refi out of it. You know, in this type of situation, you're essentially able to purchase the property for no money down. No extra money came from you to be able to do that. Number three, you can invest in a passive real estate deal like a syndication or fund. Now heloc, you can take that cash and then move it into a syndication or real estate deal. I've done that. Again, I don't like to have large sums of cash sitting in bank accounts, but I, I was presented with a really great investment opportunity, syndication deal. So I knew that because of my day job, I knew my background, the other cash flowing investments, I knew that I could pull from the HELOC to fund that investment and then the loan would be paid down in a month or two. And that's exactly what I did. The investment that I made with that amount not only produces a good amount of cash flow for me, has done quite well, but it's also appreciating value. And I was able to pay off that HELOC right away. That was my first goal, to pay it off right away. And I was able to use that money to invest in more real estate. Okay, these things that I mentioned are just ways to use leverage to increase your portfolio. Now because I know that many of us are constantly looking for ways to find more capital to invest unused equity that I say in your home investment property. I like to put it to work if possible, if you can do it responsibly. Now, as a little disclaimer, it's important to note that with anything, especially when it comes to debt, a HELOC should be used extremely carefully. You might have heard leverage is a double edged sword, meaning that it can multiply your returns, but it can definitely multiply and do the same for your losses. So if you're unable to repay the balance on the line of credit for any reason, you could risk losing the property that you put up as collateral. And obviously this can lead to a pretty disastrous result. So goes without saying, but even still, I'm gonna go ahead and say it, have a plan, and know just what you're getting into. Since we're on the subject of HELOCs, I'm gonna actually answer two questions that I get quite a bit. Number one, can you take out a HELOC on an investment property? This is a common question cause we mostly think about HELOCs when it comes to our primary residence. However, I wanna let you know, it is absolutely possible that you can do the same with a rental property. You just have to get with the right lender. There are many lenders that are willing to lend on this and not every bank will deal with investment properties. So it's really important to find that lender that deals with investment properties understands how to use your, your property as collateral for these types of loans. So I want to let you know, it's absolutely possible. The other thing that I hear a lot is why would I do a HELOC when I could just do a cash out refinance? Now that's another popular way to leverage the equity that is in your property. For example, you can do a refinance of your property, take out a bigger loan, and then actually have additional cash on hand. Let's say you bought a home for $500,000, you put a $400,000 loan on it, and now the home is worth $1 million and you still have that $400,000 loan or maybe a little less than that. And so now instead of having $100,000 of equity, meaning that you know that down payment that you put initially, you now have $600,000 of equity. So what you can do again is get a HELOC in place to tap that increased equity. Or you can do something called a cash out refinance, where you could refinance the loan and take out maybe a larger loan, like an $800,000 loan, and you could pay off the previous loan for $400,000 and you're left with $400,000 in cash in your pocket. Now that was really popular for the last five, six, seven, eight years as interest rates were diving down. That made a lot of sense as, as asset values, as home values, as investment property values all increased and interest rates were diving down. Now today it may not make as much sense because you might have gotten a loan at a low 3.5% and now you might find that if you changed out that loan, that loan would be in the five and a half or six percent. So you have to figure that out. The biggest difference between the HELOC and the cash out refinance is the interest rate though, because it's like a mortgage, a long term mortgage. These cash out refinances, you can do it with, put a fixed or some sort of adjustable interest rate on it, you can control that a bit more. These heloc, by the way, interest on these things can fluctuate over time. It's really important to look at the terms to know when they ultimately set and determine these rates, when they're fluctuating. But I will say one of the benefits of the HELOC versus the cash out refinance, number one, it's typically a faster process to get it. You typically don't have to deal with all the closing costs as you do with the cash out refinance. And it's great because if you're trying to save money to move into other things, that HELOC might be a quick and easy option for you. My suggestion however, is to realize that HELOC is a short term solution. It's not a long term solution to a loan because it's variable, maybe a little bit higher, it's not fixed, things are fluctuating. It may be worth it for you to think about it as a short term loan that needs to get paid off quickly, quick access, which should be paid off pretty soon. So here's the bottom line. If you're looking to build your portfolio in like an accelerated fashion and you've got equity built up in your home or your investment property, a HELOC might be a good option for you. The thing to consider is that again, it is additional leverage and debt. Would I use it as a long term debt option? Again, not personally. The short term thing I call, you know, consider it more of a bridge to move and in, in and out of deals. It provides that liquidity. For me that is often a challenge with real estate. So it allows me to keep as much of my capital working out there. So my goal with the HELOC is to use it, pay it off as soon as I can before investing in another deal. So I behave the same with credit cards, I, I utilize them, I don't know if you use them. Some people say they're bad, all bad. But I I utilize them, I get the points, I reap the other benefits and then I pay them off each month. I also know my current financial situation is with my day job, my businesses, my other current investments. I have good sources of cash flow that allow me to pay off that HELOC on a monthly basis without issue and that provides me some level of comfort, some security in utilizing it for short term access to cash. So of course it's not the best option for everyone. You have to know your own situation. However, debt is a tool. If you use it correctly, it can really help you accelerate things if that is what you're looking for. Again, on the other side, you have to be careful with it. So I'd love to hear from you. Have you ever used the HELOC to invest in other things? Have you used the HELOC to buy depreciating assets like a car? Have you gotten into trouble with it? Just wondering what your thoughts are on this type of product and whether it makes sense to use it to grow your real estate portfolio. Any case, hope to see many of you very soon in person. Anyways, have a great week and let's talk again soon. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group PassiveIncome Docs, and you can always learn more at our website passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.