HELOC

[Derek Bell]

This may be a rudimentary question, but if you own your primary residence outright, is it a good idea to pull out at HELOC on your home so you can acquire property, rather than going with the traditional loan or a hard money lender?

[Edward B.]

A fixed rate HELOC is really a Home Equity Loan. Yes you can get it but for a real estate investor I don't think they are a better deal. The interest rate will be higher and you HAVE to make the PI payment every month. The HELOC will accomplish the same thing except the rate will be lower and you have the option of making the principle payment or not. Pretty much boils down to how disciplined you are with your money and whether or not you need to pay the bank to force you to repay the loan.

HELOCs are adjustable to so you need to factor in an increasing payment as rates start to go up. You need to be very responsible with a HELOC on your Primary Residence because if you default you absolutely can lose your house. If you are smart and conservative with that money though it should not be an issue. It is typically the cheapest funding you can attain and allows you the flexibility to be a cash buyer.

Is it used often? I have used often. It is best with a quick payout exit strategy (quick paydown, refi, sell) so that you can reuse the money over and over. Then use the profit you make for down payments on long term buy and holds. Otherwise you will be tapped out rather quickly with the HELOC and rising rates become more of a threat if your cash flow is dependent on the low HELOC payment.