Is a HELOC a Good Idea?

For real estate investors, is a HELOC a good idea? Or too risky?

You could use a HELOC for almost anything in real estate investing:

• Down payment
• Closing costs
• Carry costs
• Rehab/construction expenses
• An entire property, if the line of credit is large enough.

A home equity line of credit is some of the easiest, fastest, most flexible money you can get.

But many investors worry it’s a risky idea – they fear a lot could go wrong with such a large line of credit attached to your house. Here’s our take on whether or not a HELOC is a good idea.

Are HELOCs Risky?

Are they dangerous? Is there a big risk in taking out a HELOC? The answer is yes and no.

It’s the same as any other line of credit. If you use it wrong (for personal use, living life, etc.), the debt accumulates with no way to pay it off. This becomes a burden not only for your credit but also for your home.

However, used correctly, HELOCs are a low-risk, high-value tool. Use them for a real estate project, then pay them off right after your project sells or refinances.

What Should I Look For to Get the Best HELOC?

The main thing you should look for in a HELOC is loan-to-value (LTV).

As an investor, you don’t need to worry much about rate – what you borrow will be paid off with your projects. Plus, a HELOC interest rate will be lower than most other forms of leverage available to you.

You also don’t need to be too concerned with the draw period. You can refinance your HELOC at any time.

Your main concern should always be maximizing the amount you can get. When shopping around, ask about LTVs.

What Kind of Property Is a Good Idea for a HELOC?

Yes, you can take out a HELOC on a property you own free and clear. A HELOC comes in first or second position (sometimes third, from some banks). So if you own your home, or a rental property, with nothing owed, then this line of credit will come in first position.

You also don’t have to take one out on your primary residence, if that feels too risky for you. Many real estate investors take out HELOCs (sometimes up to 5 or 10!) on their rental properties.

Read the full article here.

Watch the video here: