Tag Archive for: HELOC

Line of Credit vs HELOC: Which Do You Need?

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These funds can supercharge your real estate investments, but which is better: a bank line of credit vs HELOC?

Lines of credit are one of the most powerful tools a real estate investor could keep in their toolbelt – whether a bank line of credit or home equity line of credit.

Let’s go over why these are so powerful, how to put them into practice in your business, and what the difference is between a bank line of credit vs HELOC.

Example of Using a Line of Credit for Real Estate Investing

Here’s a story about the power lines of credit brings to real estate investing:

A client called us recently who purchased 34 units last year. He’s kept them all for rentals.

That’s an incredible volume of properties for one year! I had to ask him, “What’s your secret?”

It’s simple: he has a $600,000 line of credit on his other properties. So when deals come up from wholesalers and realtors, they call him first because they know he can use this line and close within days.

In total, he owns 124 units. His first goal was 100, now it’s 200. And he says the power behind all of it is that of credit.

But he didn’t start out this way. He began just four years ago with zero properties. Let’s look at how you can get started with lines of credit.

Bank Line of Credit vs HELOC – What Are They?

There are two types of lines of credit you can look at as a real estate investor: bank lines of credit vs HELOCs.

A HELOC (home equity line of credit) can go on each unit you own. This goes for your owner-occupied home, or each of your rentals.

A bank line of credit is one line of credit on multiple properties. This is how investors get huge lines of credit to purchase properties anytime, anywhere – like the previous example of our client.

The flexibility of either of these lines of credit is unmatched. You can use these funds to:

  • Close on a property at auction, where traditional financing takes too much time.
  • Use it for your rehab costs, instead of putting in escrow draw requests to your lenders.
  • Paying contractors, other payroll, overages, or other business expenses that a primary loan may not cover.

What a Bank Line of Credit vs HELOC Have In Common

Both lines of credit are a mortgage, or lien, on a property, typically in junior position. This means there’s usually a mortgage on the property already, so the lien for this line of credit comes in second position.

Lines of credit don’t work like a loan, where you take out the money, pay it back, and you’re done. These lines of credit work more like a credit card. You can take the money out, then pay it back, then take some more out, and re-use it over and over.

Also different from a loan, with a line of credit you never have to ask permission to use them. You don’t have to re-qualify each time you do a deal.

Lines of credit give you speed and flexibility in your real estate career.

Differences in Lines of Credit

So what’s the difference between a true bank line of credit for your business and HELOCs?

Let’s go over 5 key differences you should know.

1. Qualifying for a Line of Credit vs HELOC

Typically with a bank line of credit, which is a line of credit on one or multiple properties, you could have one line of credit that covers all of your properties or just part of them. You have that flexibility. But, in order to qualify, you also have to provide all the paperwork, taxes, and everything a bank usually requires.

For a HELOC, qualifying is usually just as simple as getting an estimate or value on your property, and having a good credit score. There is often minimal paperwork and little concern about your income.

2. Applying

One major benefit of a HELOC is once you get one, they’re good for a set draw period. That period is usually 5 or 10 years. So once you get it, you have it at your disposal for that timeframe. You can use it over and over.

A bank line of credit that goes through your business is less set-it-and-forget-it. Some banks will want to look at your financials every year, and some every two years. You’ll have to re-qualify every couple of years.

With a bank line of credit, you have to bring in your paperwork every few years, so you have to be sure your business stays profitable. They also re-evaluate the property’s value, which can be pro or con depending on the market.

3. LTVs on a Bank Line of Credit vs HELOC

What are they going to lend you? A HELOC on a non-owner-occupied property usually maxes out at 70% of your equity. In owner-occupied, that could be up to 80%.

Depending on your credit and your properties, a bank line of credit will probably have a maximum LTV of 75% average overall on the properties.

The LTVs on these two lines of credit aren’t that different. It’s more important that, whichever option you go with, you shop around to maximize your loan-to-value.

4. Costs

Typically, a HELOC costs a few hundred dollars to open up. So each property you put a HELOC on will have its own fees (the couple hundred bucks) and requirements every time. But remember, this lasts for 5-10 years, or until whenever you refinance it.

The cost for a bank line of credit will be somewhere between one and one and a half percent. They may need some appraisals to approve it. And remember – since it’s only a 1-2 year limit on bank lines of credit, these charges will happen at least every 2 years.

5. Source

Now, the biggest benefit of a bank line of credit: it’s in one source. 

For HELOCs, you have a small amount available on each property. So if you need a large amount, you’ll have to go to each bank or credit union and pull out the amounts. You’ll have different accounts at different banks that you’ll have to manage the payments on. You may have two HELOCs, or you might have 10 – and you might have to put all 10 together to get enough funds for what you need.

How the Find the Best Line of Credit

The benefits of a HELOC: they’re fast, easy, and they’ll stay there for 10 years. 

For a bank line of credit, you have all your funds from one source, but every year or two, you have to requalify.

So they both have their benefits, and they both have their uses. Whatever makes sense for you is what you should be focused on.

It’s sometimes hard to figure out what’s best and what banks will work with you. That’s what we could do here at the cash flow company. We keep in touch with banks to find the best credit options for investors.

If you have a question or you need someone to help find the best line of credit for you, reach out at Info@TheCashFlowCompany.com. We’d be glad to help.

For more on real estate investing, you can check out our Youtube videos here.

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How Does a HELOC Work?

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What is it, where can I put one, and how does a HELOC work?

The amount of HELOCs in the US increased by 30% from 2021 to 2022. Why?

It can be some of the most flexible, least expensive credit for many people – especially real estate investors.

But how does a HELOC work? Let’s go over the basics.

What Is a HELOC?

A HELOC is like a big line of credit based on the equity you have in a piece of real estate. You can think like a big credit card on a property.

If a property you own is worth more than the amount you owe on it, then you could be eligible for a HELOC. You can use this line of credit for anything you want.

This line of credit is typically in second position. It works similarly to a credit card in the sense that you can use it and pay it off over and over.

How Does a HELOC Draw Period Work?

The draw period is the timeframe the credit union or bank allows you to use the line of credit. They typically offer a 5 or 10-year draw period. Within that period of time, you can borrow money and pay it back over and over.

Once the draw period ends, you can’t use the HELOC anymore – you just have to pay it off. It stops being a line of credit and now acts like a fixed mortgage you have to either:

  • Pay off over time.
  • Refinance into a new HELOC with a new draw period.

Can I Only Have a HELOC on the House I Live In?

You can do a HELOC on both your owner-occupied residence and your rental properties.

A few things to keep in mind:

  • A HELOC doesn’t work on a flip – but it does on a completed rental property.
  • The loan-to-value on a rental HELOC will be less than one on your own home.
  • Some investors have 5-10 HELOCs on different properties. It’s a common strategy.

Read the full article here.

Watch the video here:

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8 HELOC FAQs: How To Use a HELOC as an Investor

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The HELOC FAQs we hear most often from real estate investors.

Over our 20+ years in the business, we’ve helped many investors get correctly set up with HELOCs.

Leverage is your best friend in real estate, and a home equity line of credit can be some of the quickest, most flexible money available.

Let’s go over the 8 most frequently asked questions we get about HELOCs.

HELOC FAQs #1: What Is a HELOC?

A HELOC is like a big line of credit based on the equity you have in a piece of real estate. You can think like a big credit card on a property.

If a property you own is worth more than the amount you owe on it, then you could be eligible for a HELOC. You can use this line of credit for anything you want.

This line of credit is typically in second position. It works similarly to a credit card in the sense that you can use it and pay it off over and over.

HELOC FAQs #2: What’s the Draw Period on a HELOC?

The draw period is the timeframe the credit union or bank allows you to use the line of credit. They typically offer a 5 or 10-year draw period. Within that period of time, you can borrow money and pay it back over and over.

Once the draw period ends, you can’t use the HELOC anymore – you just have to pay it off. It stops being a line of credit and now acts like a fixed mortgage you have to either:

  • Pay off over time.
  • Refinance into a new HELOC with a new draw period.

HELOC FAQs #3: Can I Only Have a HELOC on the House I Live In?

You can do a HELOC on your owner-occupied residence, but you can also do one on your rental properties.

A few things to keep in mind:

  • A HELOC doesn’t work on a flip – but it does on a completed rental property.
  • The loan-to-value on a rental HELOC will be less than one on your own home.
  • Some investors have 5-10 HELOCs on different properties. It’s a common strategy.

HELOC FAQs #4: Where Do You Get a HELOC?

If you’re an investor, the number one place to look for a HELOC is credit unions. Next, is national banks. Those are the two best resources for HELOCs.

HELOC FAQs #5: What Should I Look For When Shopping for a 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.

HELOC FAQs #6: 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.

HELOC FAQ #7: Can I Do a HELOC on a Free and Clear Property?

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 the HELOC will come in first position.

HELOC FAQ #8: What Can I Use a HELOC for in Investing?

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 HELOC is some of the easiest, fastest, most flexible money you can get. Your greatest limitation is the LTV of the HELOC.

Get a Line of Credit for Real Estate Investors

Want a personalized list of the best HELOCs for you?

We’ve reached out to hundreds of credit unions and banks to find the best, highest-LTV HELOCs on the market.

Reach out to us at Info@TheCashFlowCompany.com to get this report.

You can also download this free checklist of questions to ask lenders to get the best deal on a HELOC.

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What You Need To Know About a HELOC Draw Period

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What HELOC draw period should you choose?

An important consideration when you’re shopping for a HELOC is the draw period.

This period is how long you can use the line of credit before needing to pay it off. During this draw period, you can take money out, pay it back, then take it out again, over and over.

HELOC Draw Period Options

Most HELOCs come in two different draw periods: either a 5-year or a 10-year. The longer the draw period, the more flexibility you have.

However, we still recommend setting yourself up with the longest draw period available to you. When you need to refinance, but you’re stuck in a down market, you’ll probably get worse terms on your new HELOC. A longer draw period gives you more control over a better refinance.

Refinancing a HELOC

You’re able to refinance a HELOC at any time. In fact, we recommend searching for better HELOCs every 1-3 years. If you refinance before your draw period ends, then that period doesn’t matter as much.

So, when you start the process of getting a HELOC to buy an investment property, set it up to be long-term. Even if you choose to refinance, you should still look to start with the highest LTV and longest draw period possible.

More Info on Using a HELOC as a Real Estate Investor

Want more information on how to talk to banks when looking for a HELOC to buy an investment property? Download this free checklist.

If you have any other questions, you’re always welcome to reach out at Info@TheCashFlowCompany.com, or check out our YouTube channel for more tips on real estate investing.

Read the full article here.

Watch the video here:

https://youtu.be/25VFJx66yZ8

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How to Calculate HELOC LTV (And Other Things To Know)

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Simple facts: how to calculate a HELOC LTV, and more.

The #1 consideration when you start looking for a HELOC is, by a landslide, the loan-to-value.

LTV should be your priority for one simple reason: the more money you can get, the more you can do with real estate investing.

Depending on the property type, you’ll find that your bank or credit union will give you an LTV of somewhere between 70 and 90% in this market. In other markets, they’ve gone up to 100% loan-to-value.

Example of  How To Calculate LTV on a HELOC

Let’s say you own a property worth $400,000. You found a credit union that will give you a 70% LTV on a HELOC to buy an investment property.

Here’s the simple calculation:

$400,000  ×  .70  =  $280,000

So, they’ll allow $280,000 in a HELOC on that property.

If they offered an 80% LTV on the same home, then you’d get a HELOC with $320,000. At 90% LTV, you’d get $360k.

But What Is CLTV?

However, HELOC LTVs are a bit different than typical loans – after all, there’s already a first lien or mortgage on the property.

In this case, they look at a combined loan-to-value (CLTV) instead.

As an example, let’s say that property worth $400,000 has a mortgage that’s $270,000.

So here’s what the credit union will do for a CLTV:

  • They know their 70% LTV would give you $280k.
  • But since you still owe $270k, they’ll subtract that amount from your available LTV.
  • Therefore, you’ll end up with $10,000 for a HELOC.

Maximizing Your LTV

This is why LTV is so important for a HELOC. The higher the LTV, the more available funding you’ll have to put anywhere in your real estate deals.

In our previous example, the 70% LTV only gave you $10k in your HELOC. The same property with an 80% LTV would get $50k. And 90% would leave you with $90,000 to use on a HELOC – even with the mortgage still on the home.

It’s essential to make sure you’re working with an institution that will give you the maximum loan-to-value to get more flexibility in funds.

Read the full article here.

Watch the video here:

https://youtu.be/25VFJx66yZ8

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How to Get the Best HELOC to Buy an Investment Property

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3 things you need to know when you start shopping for a HELOC to buy an investment property.

For 23+ years, we’ve worked with thousands of investors and funded over a billion dollars in loans. Over and over, we find the following to be true:

Real estate investors who are set up right with financing – HELOCs, business credit cards, real private money – are the ones who succeed.

In this post, we’re going to zoom in on using a HELOC to buy an investment property. Here’s what you need to look for to get the best HELOC for your investing needs.

HELOCs – The Basics

A HELOC is a Home Equity Line of Credit. Oversimplified, this means you can get credit from the bank based on how much of your house is paid off.

A few things to note about HELOCs generally:

  • They can be on either your primary residence or your rental properties.
  • Real estate investor can benefit from taking out as many HELOCs on all of their properties as they can.
  • They provide easy, flexible access to funds for all areas of your investing.
  • A HELOC can be used for:
    • Down payments
    • Earnest money
    • Closing costs
    • Carry costs
    • Rehab costs – material, contractors, or other bills
    • Buying a property outright, if the line is large enough

There are a couple rules of thumb we follow and questions you should ask when you start asking banks for a HELOC. Let’s go over the top 3.

1. LTV on a HELOC to Buy an Investment Property

The #1 consideration when you start looking for HELOCs, by a landslide, is the loan-to-value.

LTV should be your priority for one simple reason: the more money you can get, the more you can do with real estate investing.

Depending on the property type, you’ll find that your bank or credit union will give you an LTV of somewhere between 70 and 90% in this market. In other markets, they’ve gone up to 100% loan-to-value.

Example of an LTV on a HELOC

Let’s say you own a property worth $400,000. You found a credit union that will give you a 70% LTV on a HELOC to buy an investment property.

Here’s the simple calculation:

$400,000  ×  .70  =  $280,000

So, they’ll allow $280,000 in a HELOC on that property.

If they offered an 80% LTV on the same home, then you’d get a HELOC with $320,000. At 90% LTV, you’d get $360k.

But What Is CLTV?

However, HELOC LTVs are a bit different than typical loans – after all, there’s already a first lien or mortgage on the property.

In this case, they look at a combined loan-to-value (CLTV) instead.

As an example, let’s say that property worth $400,000 has a mortgage that’s $270,000.

So here’s what the credit union will do for a CLTV:

  • They know their 70% LTV would give you $280k.
  • But since you still owe $270k, they’ll subtract that amount from your available LTV.
  • Therefore, you’ll end up with $10,000 for a HELOC.

Maximizing Your LTV

This is why LTV is so important for a HELOC. The higher the LTV, the more available funding you’ll have to put anywhere in your real estate deals.

In our previous example, the 70% LTV only gave you $10k in your HELOC. The same property with an 80% LTV would get $50k. And 90% would leave you with $90,000 to use on a HELOC – even with the mortgage still on the home.

It’s essential to make sure you’re working with an institution that will give you the maximum loan-to-value to get more flexibility in funds.

2. Draw Period on a HELOC to Buy an Investment Property

The second consideration for a HELOC is the draw period. This is how long you can use it like a line of credit before needing to pay it off.

During this draw period, you can take money out, pay it back, then take it out again, over and over.

Draw Period Options & Refinancing

Most HELOCs come in two different draw periods: either a 5-year or a 10-year. The longer the draw period, the more flexibility you have.

Also, you’re able to refinance a HELOC at any time. We recommend searching for better HELOCs every 1-3 years. If you refinance before your draw period ends, then that period doesn’t matter as much. 

However, we still recommend setting yourself up with the longest draw period available to you. When you need to refinance, but you’re stuck in a down market, you’ll probably get worse terms on your new HELOC. A longer draw period gives you more control over a better refinance.

So, when you start the process of getting a HELOC to buy an investment property, set it up to be long-term. Even if you choose to refinance, you should still look to start with the highest LTV and longest draw period possible.

2. Interest rates for a HELOC to Buy an Investment Property

The third important consideration when looking for a HELOC is the interest rate. In other words: how much will it cost you to borrow from this line of credit?

Typically, HELOCs are based on prime plus a number. That “plus” number is where the banks make the profit. Almost all banks use prime as their starting point, then they add a factor. They add either one, two, or three to prime to determine your rate. 

Locking in a Fixed-Rate

We recommend looking for a fixed rate for more than a year. We’ve been locking people into five-year fixed rates, and a few years ago, we could offer a 10-year fixed.

Adjustable rates can be a little misleading. Some banks might offer you a prime minus 5 just to get you in. It’s a bit like if a credit card gave you 0% interest up-front, then jacked it up once you get comfortable with it.

Banks try this strategy because they know that once you get a HeLOCK, you’re less likely to refinance out and stay with the higher adjusted rate. This is another reason why we think you should always be on the lookout for better HELOCs to refinance into.

More Help on Getting a HELOC to Buy an Investment Property

These are the three main things to ask about when you’re looking for a HELOC for real estate investments:

  1. Loan to value. The most important. You want to maximize what you can get.
  2. Draw period. You want the flexibility of a 5-year or longer draw, but always look to refinance.
  3. Interest rate. You want a fixed rate so you’re safe despite turbulent or declining markets.

Want more information on how to talk to banks when looking for a HELOC to buy an investment property? Download this free checklist.

If you have any other questions, you’re always welcome to reach out at Info@TheCashFlowCompany.com.

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Why You’ll Love Using a HELOC for Real Estate Investing

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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:

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HELOC Pros and Cons: Should You Get One As an Investor?

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Is a home equity line of credit a good funding option for you? Here are a few HELOC pros and cons.

A Home Equity Line of Credit (HELOC) can be a great option for real estate leverage.

However, like any financial product, there are both advantages and disadvantages to using a HELOC for real estate investing. 

Let’s explore the pros and cons of HELOC financing, so you can decide if it’s the right choice for you. 

Pros of a HELOC

  • Little to no fees. Sometimes, you might have to pay $100 or $200 to get a HELOC on your property, but there are usually little to no fees.
  • Lower rates. You’ll see adjustable rates or fixed rates. Depends on what you get, but a HELOC is usually cheaper than private money or hard money. Rates could even be as low as bank financing. You don’t pay interest unless you’ve taken money out.
  • Quick funding. You can fund a deal in as little as one day, giving you more control over the process. You can get the money as a wire from a bank, a check, or even a debit card connected to the line of credit.

Cons to This Line of Credit

  • You must own a property. You need to own a property with equity to get a HELOC. In your owner-occupied property, most banks will go up to 95-100% of the equity. So even if you only have $20,000 in equity on your home, you can still take it out for gap funding or carry costs, even if you don’t get 100% HELOC financing.
  • You need good credit. Most banks require you to get approved through income. Both credit and debt-to-income are important factors in whether you can get a HELOC or not.
  • Misuse of funds. A HELOC is as easy to misuse as a credit card is. There’s always the risk that if you don’t pay back the funds when your real estate project is done, you’ll have too many liens on your home. Treat this line of credit like a business, and pay it off once you sell or refinance a property.

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:

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How to Use Up to 100% HELOC Financing for Real Estate Investments

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How can you use a HELOC for up to 100% financing for more real estate?

Flexibility. Cheap money. Fast closings. What every real estate investor wants, and what 100% financing can give.

A home equity line of credit should be a tool in every investor’s pocket. Here’s what you need to know about 100% HELOC financing: what it is, how to best use it in your investments, and what kind you should get.

What Is a HELOC?

A HELOC is a revolving line of credit secured by a property you own – either your owner-occupied residence or a rental property.

It allows you to borrow money as needed up to a predetermined limit, which is usually based on the amount of equity you have in your home.

You only pay interest on the amount you borrow, and you can use the funds for any purpose, including real estate investing.

Why Is HELOC Financing Important for Real Estate Investors?

HELOCs are a must-have for real estate investors because they provide a quick and easy way to access funding. Whether you need to close a deal quickly or get gap funding to cover the down payment or repairs, a HELOC can help you get the job done. 

Here are 3 ways investors use HELOCs to fund their real estate deals:

Fund 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

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.

Pros & Cons of Using a HELOC for Financing

Like any financial product, there are pros and cons to using a HELOC for real estate investing. Let’s look at a few.

HELOC Financing Positives

  • Little to no fees. Sometimes, you might have to pay $100 or $200 to get a HELOC on your property, but there are usually little to no fees.
  • Lower rates. You’ll see adjustable rates or fixed rates. Depends on what you get, but a HELOC is usually cheaper than private money or hard money. Rates could even be as low as bank financing. You don’t pay interest unless you’ve taken money out.
  • Quick funding. You can fund a deal in as little as one day, giving you more control over the process. You can get the money as a wire from a bank, a check, or even a debit card connected to the line of credit.

Negatives of Using HELOC Financing

  • You must own a property. You need to own a property with equity to get a HELOC. In your owner-occupied property, most banks will go up to 95-100% of the equity. So even if you only have $20,000 in equity on your home, you can still take it out for gap funding or carry costs, even if you don’t get 100% HELOC financing.
  • You need good credit. Most banks require you to get approved through income. Both credit and debt-to-income are important factors in whether you can get a HELOC or not.
  • Misuse of funds. A HELOC is as easy to misuse as a credit card is. There’s always the risk that if you don’t pay back the funds when your real estate project is done, you’ll have too many liens on your home. Treat this line of credit like a business, and pay it off once you sell or refinance a property.

How a HELOC Works

A HELOC is like a large credit card attached to a house. You can re-use and pay off these funds over and over.

HELOC Financing vs Credit Cards

Your HELOC might function like a credit card, but it doesn’t have rates like a credit card.

Interest rates on a HELOC are around half to a third of the cost of credit card rates. HELOCs also don’t have cash limits like most credit cards. You could take your entire HELOC out in cash if you’d like, with no fee for wiring or withdrawing.

Owner-Occupied vs Rental Property HELOCs

You can also get a HELOC on multiple different properties you own. Here’s what you can generally expect as far as LTVs:

  • For a HELOC on an owner-occupied home, you can get all the way up to 95-100% of your equity available to you.
  • For a rental, the LTV caps out at 65-70% equity. You’ll have to have more equity in a rental property to make a HELOC worthwhile.

Length of the Line of Credit

A HELOC comes with a draw period. Once this period is over, they become a standard loan where you have to pay off the balance over a term just like a mortgage.

The draw period (when you can use it like a credit card) usually lasts 5-10 years.

To combat the switch to a normal loan, you can always refinance into a new HELOC. For example, you could refinance your HELOC with a five-year draw period after four and a half years. Then, you can always keep drawing on it.

Example of How a Real Estate Investor Could Use a HELOC

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. 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. 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. 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. 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.

What Kind of HELOC Should You Get?

This is the beauty of a HELOC. You’re in control. You don’t have to wait for lenders or appraisals or paperwork. You get to use the money however you need to.

HELOCs are great tools. If you have the equity, the credit, and the income, it’s vital that you find the best HELOC for you.

They come in different shapes and sizes – adjustables, fixed 5-year periods, 10-year periods. If you want help figuring out which HELOC is best for you, download this free, quick HELOC questionnaire.

Reach out at Info@TheCashFlowCompany.com with any other questions. We want our clients to get the best credit available.

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