3 ways to use a HELOC for real estate investing & an example of how it could play out for you.
A HELOC is like a large credit card attached to a house. You can re-use and pay off these funds over and over.
Let’s go over a few details you should know about how to use a HELOC for real estate investing – plus what a 100% HELOC-funded investment might look like.
3 Ways to Use a HELOC for Real Estate Investing
There are 3 main ways investors use HELOCs to fund their real estate deals:
Funding Any Deal You Want
If you have enough equity in your house, you could make a down payment, fund the rehab, or purchase the whole property with 100% HELOC financing.
We had a recent client find a great real estate deal in Oklahoma, where property and fix-up, all in, was $49,000. With a HELOC, that becomes an easy transaction to fund by yourself. You can skip all the trouble of going to a lender.
HELOC financing is especially useful for auction properties – you can get your funding within a day, pay for the property (or at least the down payment) all yourself, and stop missing great deals that cross your path.
Gap Funding with a HELOC for Real Estate Investing
Another major use for a HELOC is gap funding. Gap funding supplies money for all the smaller things a primary loan or mortgage won’t cover.
You could take money from this line of credit, and use HELOC financing for:
- Down payment
- Repairs and rehab
- Earnest money, if a buyer needs funds to hold a property for you
- Reserves, if your primary lender requires you to have a certain dollar amount on-hand for emergencies
- Carry costs, to make loan, insurance, and other payments during the rehab
Using HELOC is the cheapest way you could fund these gaps in your loan.
Put More Down on a Property
So the third way that people use HELOCs is to put more down on a property to get better loan terms and rates.
If the bank requires another 10% more than what you have, then you can take money out of the HELOC to use. This could mean the difference between getting back financing instead of hard money or private lending.
Even if the bank doesn’t require the extra 10%, the more you can put down upfront, the more you save overall in better rates and terms.
Even if your HELOC isn’t big enough to fund an entire project, it can help you save money in smaller ways like this.
Example of How You Could Use a HELOC for Real Estate Investing
Let’s say you have a HELOC of $100,000. How can you use that in a real estate deal for 100% HELOC financing?
1. Earnest Money
You find a property you want to put under contract, so you need $2,000 for earnest money.
Instead of going to a lender or putting up your own cash, you go to your bank, have them cut you either a cashier’s check or a check on your account, put it with the title, and now you have earnest money on your account.
You now have $98,000 available in your HELOC. You’re only paying interest on $2,000.
2. Down Payment & Closing Costs
Next, you need to put in a down payment and closing costs of $10,000 total. You call your bank and have them wire it to the title company from your HELOC.
You now have $88,000 still available, and you’re paying interest on $12k.
3. Rehab & Extra Costs
Now you’re doing your projects. You need to make repairs, pay the mortgage or hard money loan, and cover taxes.
You could put a bunch of money from your HELOC in your checking account up-front, draw from it monthly, or ask your bank about a debit card. All the expenses could go on this card – you just have to keep good accounting.
Let’s say you’ve spent $30,000 total on mortgage payments, paying contractors, and other costs. This means you took $42,000 total out of your HELOC.
Note: You’re not paying interest on the full $100k limit of your HELOC. You only pay interest on the amount you’ve taken out – in this case, the $42k.
4. Paying It Off
Lastly, you sell the property or refinance it as a BRRRR. You take these funds and put it back on your line of credit.
Now, you have $100,000 again to use on your next project.
If you want help figuring out which HELOC is best for you, download this free, quick HELOC questionnaire.
Read the full article here.
Watch the video here: