You are a home owner that is looking to invest in real estate. You are thinking about taking out equity out of your primary residents to buy a rental property.
You are probably asking your self ” Is this a good idea?” “Am I taking on a huge risk?” “What are my options?”
Is It Smart To Use A Home Equity Loan To Invest?
Taking out equity for the purpose of investing in a rental property is a good idea if you ask me. I will explain why I think that, in this article. These will be my thoughts, speaking from the experience that I have with taking out equity and buying rental properties.
I will also add some information on my first rental property that I bought using a heloc. Just to put things in perspective.
After living in my first house for 2 years I had enough equity built up to get a HELOC. I had already bought my first rental property a year before with a regular mortgage and a 20% down payment.
I started saving for my second rental property purchase. I never stopped reading and learning, spending hours on the phone or laptop looking at deals, reading blogs, and real estate articles just like this one.
I came across a comment where a guy said he used equity from his home as down payment for 3 rental properties that he purchased.
BOOOOM I decided that was what I would do:)
I was excited and nervous at the same time, I loved the idea but I had my doubts.
I had the cash saved by now to buy a rental property the same way I bought my first but I wanted to try this new way.
The Rental I Bought With The Help Of A HELOC
I decided that I would use the HELOC for the 20% down payment which was $8,000 and I would also use it for closing cost another $2500. A total of $10,500.
This was I won’t have to use any of my own money.
I wasn’t confident and didn’t have enough experience to buy multiple properties at once. Sow I went with one.
I contacted Wells Fargo because they had my mortgage at the time. I told them what I was planning on using the equity to buy another rental property.
I filled out an application online, and was in contact with a representative from the start.
After submitting all the paper work required for a HELOC including prof of income, proof of employment, appraisal on the property and some other things.
The entire process took just over 4 weeks. I was told it takes anywhere from 4 to 7 weeks.
Great Investors Always Stay A Step Ahead
During the process I was out looking at properties almost every single day. I had a property with great numbers lined up but it got sold before I got my HELOC. Long story short after I got my HELOC it took me another 3 weeks to find a property that matched my criteria.
I got approved for a mortgage by my lender. (I was in contact with him from the start)
I found a property for $45,000, I inspected the property and talked to the owner. Later that night I called the owner and offered him $40,000. He said he will talk with his wife and let me know something in the morning. I said ok. He called me first thing in the morning saying he will accept the offer. My real estate agent did the rest.
I bought the house for $40,000 I used my Heloc for the down payment and closing, total came out to $10,500.
The whole process was almost identical as any other rental purchase.
At the end of the day my mortgage and the Heloc was a total of $355 a month, the property rents now for $950 a month. A nice return.
Best part about the whole thing is, I didn’t use any of my own cash:)
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Taking Out A HELOC Pros and Cons
•No cash out of hand
•Better interest rate( not all the time)
•Buy bigger better deals
•Process to get a Heloc can be a little time-consuming (plan ahead and stay in touch with agent and loan officer)
•It’s another loan
•Primary residents is now at higher risk.
To simply answer the question a Heloc is a very good option if you plan on speeding up your investment portfolio.
But it does come with its own risk and you have to be very disciplined and strategic when using a Heloc.
Learn all you can before taking the plunge. I would also recommend having a good amount of money saved, in case things do go south and you have to pay the HElOC off completely.
Know your comfort level and invest accordingly.
If you have any tips or experience with a Heloc please leave a comment below. Or if you ever did a deal similar to this one:)