There are so many ways to buy houses. One often unexplored is using a home equity loan to invest in rental properties. You may not have even ever heard of this way to get money. It is an amazing way to fund your investments without worrying about digging into separate mortgages or loans.
So, I want to dig in a little about this way to get ahold of some money to invest in more properties. Let’s get to it!
How to Use a Home Equity Loan to Invest in Rental Properties
First, thing’s first, what is a home equity loan? A home equity loan, also called a home equity line of credit or HELOC, is when you borrow money against a property that you own in order to buy more houses. Make sense?
Let’s say that the primary property where you live is all or nearly all the way paid off. So that means that you have however many hundreds of thousands of dollars in equity from that property. When you use a home equity loan, you are borrowing against the equity that you have and using that money to make more money.
Now, when I explain things like mortgages or loans, I like to compare them to the game Tetris. Remember that game? The blocks get stacked up and then will collapse when you get so many stacked up on top of each other. In my book, mortgages are like this.
You can stack them up only so far before you want to pay them off and “collapse” some debt.
So, if you find a seller who wants to unload their property for $0.50 on the dollar, you might be like one of my FDDF ladies and have $50,000 in the bank from last month (which she actually did!) This lady could just cash out the seller with the money she made last month. This just added in a new rental property, but without any debt.
Not everyone, though, has $50,000 in the bank. And other people really don’t like the idea of lease options or wholesaling, but they have equity in their primary home that can be borrowed. This is the beauty of using a home equity loan to invest! You don’t have to go through all of the same cycles of other investment strategies because you already have a property with the equity to use: your own.
So, how does it work? If you live in a house that is worth maybe $250,000 and you have paid it down over time, you have a bunch of equity just sitting in the value of the house. You can use that equity!
You can take out a home equity loan to invest in some rental properties or even growing your investing business.
Typically you can take out these loans at about 80% or so of the total value of the house. For a $250,000 home, that would be a loan for $200,000. Since COVID has affected some of these things, it might be a little lower, but that is still a large amount of money, y’all.
One of my FDDF ladies did this with pretty close to the same numbers. I believe she pulled about $150,000 as a home equity loan to invest in her business. She took that money and put it to work for her! It was used as a down payment for two duplexes and a triplex in order to secure 30-year mortgages. She also used it to fix up anything that was needed, as well as paying me, her investment coach.
She split that money from one single loan into a bunch of different purposes. You can use a home equity loan to invest in so many things! In fact, you can even use it to pay off other debts, like credit card debt. If you have credit card debt at 20-25% interest, you could get your HELOC at 7-8%.
Of course, you need to pay off these loans just like any other debt, but they are another tool in the toolbox to help you get money to use for investing. That is the power of using a home equity loan to invest in rental properties.
You can use an asset you already have to make even more money and then use the income you create to pay it all back off.
Now, this is of course why I am more of a fan of creative financing options and using other people’s money to invest, such as with lease options and seller financing. Then the debt that is being racked up will not go against your credit. Make sense?
But, there is a benefit to using a home equity loan to invest, too, and it ultimately is up to you as to which path you want to use. Or use them all! There is no limit to what you can do to grow your investing business!
When I first got started I did a lot of “debt collapsing.” Since I worked with lease options and would regularly get option fees, I often received $5k, $10k, $3k checks from my tenant buyers. This meant I was making something like $20k to $40k a month some months. So, every quarter or so I would take all of that money and look at what house I could pay off. Then, I would.
By the end of my first year, I ended up with 2-3 houses completely paid off, free and clear. No mortgages, no debts, no nothing. Just income.
In my second year, I got into apartments, instead of just single-family houses. And since I then had 2-3 houses all paid off I was able to use one or two of them to borrow against. I used a home equity loan to invest in my next venture with apartments, which helped me grow my portfolio even more!
So, yes, you can take out a home equity line of credit on your primary property or your investment properties. The money is yours and the properties are now an asset that you can borrow against to further your investments. It is awesome!
Don’t overlook the power of using a home equity loan to invest!
If you are looking for another way to get a hold of some money in order to grow your investment properties, this might be an option for you. You might be able to use a home equity loan to invest in your next rental property and use the assets you already have to make you more money.
Real estate investing is an unending world of opportunity and strategy. There are SO many different ways to do this. Now you have yet another tool in your toolbox. Continue to learn how to use it wisely!