Ever wonder how to use HELOCs to help you invest in real estate?
Deni & Brian walk through several ways to use HELOCs and other rotating credit lines to cover down payments on investment properties, renovation costs, and other real estate expenses.
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We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.
Deni: Welcome to Spark Rental, Facebook Live and eventual podcast. Last week, I had the opportunity to talk to Sharon Vornholt, who talks about probate investing, and she was quite interesting, actually. It was something that I never even thought of doing, and now I kind of looked into it, and I’m going to consider it today. We have Brian back and he’s back home, and we’re going to be speaking all about HELOCs for down payments on rental properties. So, if you have any questions, pop them in the chat box and also let us know where you’re, you know, tuning in from. So, without further ado, Brian, let’s jump in and just kind of give us a brief on what HELOCs is.
Brian: Sure. So HELOCs stands for home equity line of credit. It’s a rotating credit line, kind of like a credit card that you can draw on as you want and then pay down at your own speed. Unlike an installment loan, like a home mortgage or a car loan where you have a fixed loan amount and you have to make fixed monthly payments towards every month, God so rotating credit lines so you can pull money from it as needed and pay it back at your own pace. But it is secured against real estate, unlike a credit card. So, if you default, the lender files foreclosure against
Deni: A house right now, you can take them on a rental property.
Brian: That’s right, and a lot of landlords don’t know that. And to be fair, a lot of lenders don’t do that. So, in fact, most lenders only offer HELOCs against primary residences. There are a handful of lenders out there who do offer them against either investment properties like Ron Properties or second homes like, you know if you have a vacation home that you use part of the year and maybe rent out on Airbnb another part of the year. There are a couple of lenders that do lend against those properties as well.
Deni: Gotcha. Gotcha. And I have put a link that talks a little bit about or a lot about how to get HELOCs on investment properties. What other uses? Can they provide for?
Brian: Sure. So, there’s a couple of things you can do with HELOCs as a real estate investor, so the most obvious one and the one that you know we’ve been talking about already is drawing on it to cover the down payment for a new rental property. So, when you take out a rental property mortgage, you typically need to put down at least 20 percent off, often 25 percent or even 30 percent. So that can end up being a lot of money, right? You know, if you’re taking out of a $300000 property or buying a three thousand property, 20 percent on that is $60000. So, most of us don’t have that sitting around collecting dust in our savings account. So, you can tap into your HELOCs to cover some or all of that down payment. It’s worth noting that with investment property loans, you can borrow the down payment, whereas home mortgages you for your primary residence, they don’t typically let you borrow the down payment. Ask you on the mortgage application is any part of the down payment borrowed and you have to select yes or no. And if yes, then you have to answer a bunch of questions about it, and they probably won’t lend you money well. But with investment property mortgages, they do typically allow you to borrow the down payment. So, so you can, so you can tap your HELOCs for a down payment to buy a new rental property.
Read more: 17 Clever Ways to Come Up with a Down Payment for a Rental Property
Brian: You can also tap your HELOCs to renovate an existing property that you have or to renovate a property that you are about to buy. You know, without having to get takeout a purchase rehab loan specifically, you know, from like a hard money lender. So, you can tap your HELOCs to cover that renovation, funding or financing. You can also theoretically buy a property outright if you’re buying cheap property and you have a big. You could theoretically, you know, pull the money directly from your HELOCs and use that to buy the property in cash. You know, I actually at one time, bought a low-end property that needed a lot of work. I bought it on credit cards, you know, I pulled the wow credit cards to buy the property and to renovate it. And then over the next few months, I very aggressively paid down that credit card balance. That’s not something that I recommend for the average investor. You know, you can quickly run into trouble with those, you know, 24 percent credit card interest rates and you have to be you have to know for a fact that you can pay off that balance really fast, like within a few months, basically. But yeah, with a HELOCs, you know, it’s flexible financing that you can tap into whenever you need it, and then you can, you know, repay it on your own schedule.
Brian: So, whether that’s a down payment, whether it’s buying a property outright in cash, whether that’s renovating a property, you can do all those things. Or, you know, you can put it towards growing your real estate business, you know, things like sending out a bunch of direct mailers, right? You know, because there is a cost associated with that sort of thing, you know, using software like, you know, we use prop stream, for example, to find, you know, foreclosures or properties with tax liens and tax sale. And then, of course, mailing those people. So, you can, of course, use a HELOCs to fund that activity as well. And by the way, it’s worth mentioning, we didn’t talk about this earlier with exactly what is HELOCs and how it works. Often times HELOCs have two phases, so there’s a draw phase where you can use it like a credit line and open credit line as we’ve talked about. Often, HELOCs will switch over to a paydown phase where it locs and you can’t pull money out anymore. And at that point, it basically starts functioning like a traditional mortgage, like an installment loan where you have to make regular monthly payments to pay down your balance within a certain time frame. So just something to note.
Deni: Curious going to ask Is there any time where it’s better to get a refinance cash out? Instead of the HELOCS.
Brian: Yeah, so I’m not a big fan of refinancing, I mean, you know, there are, of course, times when it makes sense, you know, if you for some reason took out an original mortgage with a really high-interest rate and now you qualify for a way lower interest rate, you know, it can maybe make sense to refinance for the lower interest rate. Like you said, there are times when you may want to refinance to pull out a whole bunch of cash and put it towards something like a down payment on a new property. I still think HELOCS is a better bet for that for a couple of reasons. One, it’s more flexible. Two, you don’t have to open an entirely new mortgage loan and restart your amortization schedule. So that concept gets complicated quickly for people who don’t know how amortization works. But when you take out a mortgage at the very beginning of the loan, most of your monthly payment goes towards interest, and then over the lifetime of your loan that changes. And with each payment, you pay a little less towards interest and a little more towards principal. So, you don’t want to restart from zero with that where most of your monthly payment is going towards interest.
Read more: The BRRRR Method in Real Estate: Invest with No Money
Brian: And you also don’t want to extend your debt horizon that much further into the future by refinancing and having your payoff date be 30 years from now, instead of 30 years from 10 years ago when you first took out the loan. So, I don’t I never really recommend refinancing unless there’s a very specific reason why. Here’s what I would propose for someone who has some equity in their property, and they want to use that equity towards a down payment on a new property or towards buying a new property. And if you don’t want to take out a HELOCS for some reason. One thing that you can potentially negotiate with the lender is a blanket mortgage, where they put a lean not only against the new property that you’re buying but instead of a down payment. They put another lien a second lien against your existing property with equity in it, so they cover 100 percent of your purchase price. You don’t have to put down a down payment, but they do take additional collateral from you by putting another lean against your existing property that has equity in it.
Deni: All right. We have Tim Dooley saying, Hey guys, hi Tim.
Brian: Hey, Tim, happy new year!
Deni: He said he likes are getting harder to find. I’m actually put a link into a company called Figure where that’s what they do. And we have a question from Marissa. What are your thoughts on refi till you die concept?
Brian: Well, there’s a. So, I’m not opposed to it, but there’s a. So, here’s a quick breakdown of how that works. So, you buy a rental property when you’re young with, say, a 30-year mortgage over the next 30 years, your tenants pay off that mortgage for you, basically. And then suddenly you find yourself with a free and clear rental property on your hands with a lot more equity in it, you know, 30 years down the road. So, at that point, you could keep it with no mortgage, of course, and just pocket all of the cash flow each month. But the refi you die strategy is that you go out and you take out a new mortgage on that once you’ve paid it off. And that way you get to pull equity out of the property. You don’t have to owe any taxes on it when you die, that property goes to your children, and they there’s less equity in it then as well. So, you know, they don’t have to pay taxes on it. If you’re over the exemption for inheritance taxes, so that that all makes sense to me and that all is fine. You know, you avoid capital gains taxes, you never saw the property, but you can still keep tapping equity in it.
Brian: What I don’t like is when people keep refinancing like every five years or every 10 years, rather than paying off the property in full before going out and taking on another mortgage. Because then you just keep extending your debt horizon and keep restarting your amortization schedule from scratch rather than getting later on in your mortgage. We’re actually a huge chunk of your monthly payment is going towards paying down your principal. That only typically happens in the last five or 10 years of a 30-year mortgage. You know, for the first 20 25 years of a 30-year mortgage, most of your payment is going towards interest. So, so yeah, the refi to die concept. I like it. If you are paying off your mortgage in full before you go out and refinance. I don’t like the idea of people going on every few years refinancing. Keep in mind, too, you’re going to pay thousands of dollars in closing costs every time that you refinance a loan, and that’s money that is just flushed down the toilet. So, you know, yeah.
Deni: And I Think once people forget about that because to be honest with you, the lenders make it so appealing, but they don’t tell you that part,
Brian: Right? They sweep it under the rug by saying, oh, we’ll just roll it into the loan. You’re still paying for it. I mean, in fact, you’re paying interest on it. So yeah. And by the way, so Deni you mentioned figure a minute ago as an example of a lender who does offer HELOCs. I wanted to just comment a couple of things about figure that are awesome. First of all, they do offer HELOCs against rental properties and against second homes, which not many lenders do, you know like we talked about a few minutes ago. So that is one thing that makes them stand out. They’re also they’re a disruptive fintech company. I think out of, you know, the Silicon Valley, but it’s all handled remotely. I mean, so they typically approve your request within a day of you applying and they fund you within five days, typically so really fast they do a virtual settlement. You don’t have to drive in somewhere and sit down with a notary. They have a virtual notary that sits down with you on the Zoom meeting. It’s really efficient and really fast. So, check out figure there. They’re pretty good.
Deni: That’s awesome. Now, what if you don’t have equity? Is there any, any other things that you can do?
Brian: Yeah. So, you know, like I said earlier, I once bought a property with credit cards, but you can get a little bit more sophisticated than that than just using your personal credit card like I did. You can open business credit cards and unsecured business lines of credit. So, we work with a company called Fund and Grow, which we highly recommend. It’s like a business credit concierge service for lack of a better way of putting.
Deni: It blew my mind when I first heard about that concept.
Brian: Yeah, so they will sit down with you, and they will help you open between typically between $150000 and $250000 in business credit lines. Now that’s not all one line of credit or one credit card. That’s a combination of a bunch of credit lines and credit cards. So, they’ll do like three rounds of fundraising, as they call it, over the course of a year where they help you open these credit lines and credit cards all unsecured. They’re not secured against any of your properties, not your primary residence, not your rental properties. All unsecured. And then they also show you how to how to tap into those for real estate investing. In particular, you know how to pull money out with minimal. Cash advance fees, you know, they use a company called like plastic and it’s pretty good. It’s a large one-time fee, but once you pay, I think it’s somewhere around $4000, but they’ll help you open hundreds of thousands of dollars’ worth of unsecured business credit lines.
Deni: some it like a somewhat zero credit or zero interest for a little while anyway,
Brian: For an introductory period. Yeah, and sometimes those introductory periods are pretty long. Sometimes they’re like 18 months. So yeah, no, it’s a great service. We highly recommend them. We’ve actually we’ve done a webinar with them before, actually, that shows you exactly how to use their business credit lines for real estate investing. So, we’ll share a link to that webinar as well.
Deni: Now, Marissa also said she loves plus.
Brian: Yes, a classic. That’s the service where you can pull money out of your credit cards without paying the credit card company a cash advance fee. Ok, now they still charge a fee. I think it’s somewhere like two and a half two-point-five percent, which is still lower than the credit card companies charge you, which usually starts at like four percent for cash advances on your credit card. So, and credit card companies put a limit on your cash advances that you can pull out of, which is way lower than your total credit limit, right? For credit cards. So, plastic gets around that as well.
Deni: Got you with fund and grow that you were talking about. They also help you do this without either to build your credit or because oftentimes you will open a credit card, you’ll take you’ll use that money, but it’ll affect your credit.
Brian: Right. So, it does. When you apply for new lines of credit, it will ding your credit temporarily. Fund and grow will actually scrub your they’ll scrub that off of your credit report in between each round of fundraising, so they’ll help you clean all the detritus and all the dings off of your credit report in between each time that they help you open these lines of credit. So, yeah, it’s a great service.
Deni: Awesome, and I did include the link for Fund and grow and the webinar, the webinar is pretty cool. Definitely worth watching. And what else do you have for us, Brian, regarding this?
Brian: That’s it. No, it’s a pretty simple concept, you know, you open a HELOCS or these unsecured business credit lines and you can tap into them whenever you like and to put toys down payments towards, you know, repairs and renovations towards, you know, buying cheap properties outright and you pay it back at your own speed. You know, a lot of real estate investors will kind of churn this over, you know, do things like the BRRRR method, you know, buy, renovate, rent, refinance, repeat so you can use these credit lines and you can kind of churn through these and then pull your money back out from a long term mortgage when you refinance these, these fixer-uppers for four long term rentals. So, yeah, flexible funding never hurts.
Deni: Tim said. I think he made a mistake. Only there are songs or any dings.
Brian: So, they’ll help you clean up your credit report and remove those dings from applying.
Deni: Oh okay, he’s saying, well, they just remove, you know, fund and grows things or anybody’s.
Brian: I think anybody’s, and they’ll also help you fix any errors on your credit report as well. If and which, by the way, a lot of people have errors on their credit reports because, you know, when you think about it, the credit agencies, the credit bureaus are processing trillions of transactions a month across hundreds of millions of Americans. They’re going to make mistakes and they’re going to make a lot of them. So, you’d be surprised how many people are running around out there with errors on their credit reports are costing them points on their credit scores. So, yeah, they’ll help you clean that up, you know, before each round of financing of fundraising. And they do three rounds of fundraising total over the course of one year when you sign up with them.
Deni: All right, cool. Well, thank you, Brian. That was very informative. And if anybody has any questions after we kind of close things up here, just reach out to us at either [email protected] Or [email protected]. And please let us know if you have any topics, you want covered. We’re ready, willing, and able to cover them. And I think that’s it.
Brian: That is, it. But yeah, you know, as you guys know, it’s a mom-and-pop business over here, Deni and I read all of these suggestions ourselves, and we take them seriously because we want to talk about what you want to hear about. So let us know what you want to hear about. And you know, we’ve got some really exciting content coming up in 2022 to some good webinars which are always free and some good podcast guests coming up. Some great articles on the blog and interviews, and we are super pumped to be with you guys, you know, this year and every year.
Deni: So absolutely. And the new year again, everyone. And thank you, Tim, for your kind words and thank you for Marissa for your questions.
Brian: All right, you guys. We’ll see you next Tuesday.
Deni: Bye bye.
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