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A worker who retired early thanks to real estate investing bought his first rental property by taking out a home equity line of credit. Here’s how HELOCs work and how they can be used to build wealth.
Heloc To Buy Investment Property
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Invest In Education With A Heloc
Florida-based investor Mark, who prefers not to share his last name for privacy reasons, is living proof: He’s never made more than $52,000 a year in a police officer’s salary. But he managed to build a 25-unit property portfolio in less than five years and retire early at the age of 50. Insider confirmed his ownership.
He used various strategies to get the money needed for the raise, from taking out a 401(k) loan to using a self-directed IRA.
To finance his first investment property—a $100,000 single-family home in Shenandoah Valley, Virginia—he took out a home equity line of credit (HELOC).
When he bought the property back in 2017, he had about $25,000 in savings, he said. He didn’t want to use his entire nest egg to cover the down payment and closing costs, though, and that’s where the HELOC comes in.
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Of the $30,000 HELOC he opened, Mark used about $17,000 of his total limit for a down payment on a property, and covered the rest of his start-up costs with his existing savings.
Mark was in a good position to get a home loan because he had already paid off his primary residence, a single-family home that he and his wife bought in 1998 when they moved to Virginia after his career. in the Navy. They paid off their mortgage early, in 2015.
“If someone is in the same situation as I was, where the main residence is paid, they live cheaply, and he just wants a little help, using a HELOC can be a good way to go to some money and a competitive interest rate,” Mark told Insider. “Often, it’s cheaper than a mortgage rate.”
A home equity line of credit allows you to borrow against the higher value of your home to access cash. You can find one almost anywhere a mortgage is offered: major national banks, local independent banks, credit unions, and online-only banks.
Can I Get A Heloc On Investment Property? How?
It works the same as a credit card – you get a credit limit that you can borrow for a period of time, usually five to 10 years, known as the “draw period” – but the money you get a loan will come. out of your home equity. Once you open a HELOC, you don’t need to use it right away. You can use what you need when you need it. You might even open one and never use it.
During the withdrawal period, you can usually withdraw money in one of two ways: credit card linked to the account, cash withdrawal, or online account transfer. You will have the minimum monthly payment when you start withdrawing, which is usually interest only during the withdrawal period, but you can also repay your principal if you want.
Exact loan limits can vary by lender, but most HELOC lenders will allow you to borrow up to 85% of your home’s value (less your equity). You don’t need to know that, though.
Mark, for example, wanted a small HELOC. His home was fully paid for with a value of about $200,000 at the time, meaning he could have taken on $170,000, but he chose to borrow $30,000 – or, about 15% of the value of his home.
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Note that HELOC lenders generally require you to have a high credit score (at least 620 and sometimes above 700). You must also have home equity, meaning the amount you owe on your home is less than the appraised value of your home. Lenders may also look at your income and debt, and require a debt-to-income ratio of 40% or less.
Don’t confuse a HELOC with a home equity loan, which gives you a lump sum up front. HELOCs are credit accounts and you can borrow as often as needed up to a certain amount, making them ideal for situations where you’re not sure how much you need to borrow.
For example, if you are remodeling and think you need $40,000 but you have finished the project for $25,000, you can only use the $25,000 you need, you have to withdraw it with interest on this amount. However, if you used a home loan and took $40,000, you would get this money as a lump sum and you would have interest on everything.
You don’t need to use your HELOC money to finance your home expenses. You can technically use it to finance anything, from starting a business to paying for college.
Heloc Vs. Cash Out Refinance
“I remember sitting in the credit union office and wondering, ‘So when I get this HELOC I can spend it on whatever I want?'” Mark recalled. “And the lady was like, ‘Yeah, whatever you want’.”
That said, if you want to use one to build wealth, you won’t want to use that money to finance a vacation or a new car, for example. If you choose to use it, you’ll want to be smart about how you do it.
HELOC terms vary from lender to lender, but they typically have a repayment period of 10 to 20 years and come with a variable interest rate. Rates tend to be relatively low compared to other forms of borrowing: As of July 2022, the average interest rate for a $50,000 HELOC was 4.92%.
When the repayment period begins, you can no longer borrow against your line of credit. You repay your loan, including principal and interest, in monthly installments.
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Mark began paying the principal and interest right away. He found a tenant in the building he bought with the HELOC, started collecting rent regularly, and made a profit of about $220 a month, he said. He put some of that money into savings and used some of it to pay off his HELOC balance.
If you fall behind on your HELOC payments during the drawdown phase, your lender may prevent you from borrowing more. You may be able to work on a repayment plan, in which you summarize your monthly payments and a little more to keep you.
If you can’t repay, eventually, your lender can foreclose on your home and you can lose it to the bank.
There are also upfront fees that come with HELOCs, such as an application fee or home appraisal fee. You’ll want to avoid a HELOC if you can’t afford these expenses.
Requirements For A Home Equity Loan Or Heloc In 2022
Keep in mind that you do not want to max out your debt. When you take out a HELOC, you are taking equity out of your home. If the market goes down, you could be overburdened and owe more on your home than it’s worth. With house price growth expected to slow in 2023, too much stress has become a major risk now.
Ideally, you want to use the money in a way that will help you build wealth. This could mean buying a rental property that generates positive cash flow, which is what Mark did, or financing a home renovation to increase the value of your property.
Mark is just one investor Insider spoke with recently who has successfully used a HELOC to buy investment properties and build wealth. Bryce DeCora, a 30-year-old real estate investor based in Washington, took out a loan to expand his property portfolio and became an “Airbnb millionaire.”
It was dangerous, he told Insider. At one point, he had a $284,000 mortgage on his first home, a $312,000 mortgage on his second home, and an $80,000 HELOC, meaning he was $676,000 in debt. But the strategy paid off.
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Another real estate investor, 43-year-old Amanda Hammett, started using a HELOC. He worked with a local bank and took out a $70,000 line of credit, which gave him enough to buy 19 properties at once from the same investor. Hammett is currently making a profit of $6,500 per month in rental income.
“There was risk in taking out a HELOC on my personal home, but being an entrepreneur increased my risk tolerance,” he told Insider. “I knew what I wanted to achieve in the long term – time of freedom for my family and a comfortable retirement – that I had to take this step. I believed in myself and I had to take this risk for the future of my family. increased and I had confidence in my numbers and the team I deployed.”
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