There’s nothing like spending hundreds of hours looking for property, finding a great deal—and not being able to buy your first investment property.
I should know. This was my life for years. I listened to hundreds of BiggerPockets podcasts, read dozens of real estate books, and underwrote hundreds of properties. At that point, my real estate portfolio consisted of our primary residence and nothing more.
At that point, I was pretty frustrated. I knew I was better than what my portfolio consisted of—I just didn’t have the money to put down on a rental property. I had been working a stressful job, making just enough to live paycheck to paycheck comfortably.
Now, keep in mind that there are strategies out there where you can put little to no money down, but I was (and still am) into multifamily syndications, where I needed to put in some capital.
At the rate we were saving money, it would have taken about seven to 10 years to save a $50,000 investment. That would have been just one investment property. It would have taken years just to get into another property. That was not a timeline I was okay with. At the time, $50,000 was more than I was making in one full year at my job (eventually, I would get a sales job that paid better, though).
I was still determined to invest in real estate, but I was getting more and more frustrated by not being able to come up with the capital. The route we were taking was not going to work for my family in the long run. I thought about borrowing money, credit card advances, etc., but I just could not make it work.
In the meantime, I was still looking for properties any chance I could. That wasn’t great for me since it only made me feel worse—like I wasn’t living up to my potential. I still wasn’t able to invest, even though our cash flow was improving.
The Turning Point in My Investing Journey
Sometime later, by random chance, I watched a YouTube video that was not real estate-related. The YouTube gods were in my favor, and the “Up Next” video was about how I could pay off my home in seven years. With the new job, it would have taken me only about two to three years to save up $50,000, or I could pay off my home in about seven years.
You may have heard of something called velocity banking. I didn’t know it then, but that is exactly what the video talked about. It had me thinking that velocity banking was one of the best routes I could take. I thought, “Instead of waiting two to three years to invest, maybe I could at least start paying off my home.” After all, I grew up with a middle-class mindset, where debt was a bad thing.
One of the options to pay down my home was by leveraging a HELOC. As I started learning more about HELOCs, I was quite intrigued with the options they offered.
There Are Plenty of Options
I reached out to dozens of lenders to explore HELOCs. Some lenders offer interest-only HELOCs. Some offer principal and interest, and some will differ on fixed versus adjustable interest rates. On top of that, the loan-to-value (LTV) ratios can be anywhere from 60% to 100%. I found that local credit unions usually offer the best options, but it also depends on what terms you are looking for and what your investment strategy is.
There are also different draw and repayment periods. A draw period is how long you can pull money out of a HELOC. The repayment period is how long you can repay the HELOC. I have seen draw periods from three to 10 years and repayment periods of five to 20 years, but it will vary.
The closing costs I have seen for HELOCs have been anywhere from $0 to $999. I am sure some lenders have higher closing costs—I just haven’t seen it. Typically, there is an appraisal needed, but not always. It will depend on the lender and how much equity you have in your home. Some lenders may not require a full appraisal.
There are several ways to use a HELOC, so be sure to ask lenders different questions about rates, LTVs, equity draws, and refinancing.
The Strategy I Used
After speaking with lenders, I analyzed the numbers, put them in a calculator, and came up with a strategy.
The strategy was really simple: pay down my home and invest in real estate at the same time. That’s where the HELOC came in.
Our first HELOC allowed us to pay down $50,000 in principal off our home, which saved $30,000 in interest. We still had to pay interest on the HELOC, but that was only a few thousand dollars over the course of a year. But by using the HELOC, we saved about seven years of mortgage payments on the back end. Later on, we refinanced the HELOC to increase its credit limit and invested in two apartment syndications.
All of this is straightforward as long as you select the right HELOC. As mentioned, we structured our HELOC in a way that worked best for our situation, both financially and for our investment criteria.
However, it isn’t a “one-size-fits-all” approach. Due to the various HELOC options, it is important to understand your business model and what is important to your situation.
If you are in other niches (wholesalers, mobile home parks, BRRRR, etc.), you can still use the strategy I’m using. In fact, you could use it even better than I did. It’s a great way to build wealth with other people’s money (OPM). In fact, you could say I took the slow option by passively investing in a syndication as opposed to taking an active route with better returns.
Overall, no matter what type of investing path you take, don’t let the equity in your home sit idle.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.