How to use a HELOC to start investment journey

[Oscar Vazquez]

Hello, I'm looking to get started in real estate investing. I currently own a property that is valued at 850K and my current loan on my mortgage is 272k. I'm considering getting a home equity line of credit (HELOC) of 250k-320k to begin my real estate investment journey. What is the best method you would advise me to use this HELOC to get started? TIA

[Robert M.]

Quote from @Oscar Vazquez:

Hello, I'm looking to get started in real estate investing. I currently own a property that is valued at 850K and my current loan on my mortgage is 272k. I'm considering getting a home equity line of credit (HELOC) of 250k-320k to begin my real estate investment journey. What is the best method you would advise me to use this HELOC to get started? TIA

You’re fortunate to have a lot of equity in your home, and there may be some great opportunities ahead for you. Given the amount of money you’re considering putting into play and the fact that your personal home would be at risk, I will add some strong cautions about the heloc in addition to offering some suggestions for how to use it.  Perhaps this information will help future readers if you already know and are prepared for these risks.

Helocs are almost always at variable rates, and interest rates are likely to go pretty high in this economic environment.  So, if it’s possible to leverage your heloc for shorter-term projects (brrrr strategy, for instance) rather than for a longer-term investment, that could be wise.  Of course, some of the short-term strategies (like brrrr or fix and flip) are risky right now too since housing prices may become unpredictable soon. You’ll want to look at the risks on both sides of that equation, and the best advice I can possibly give is to be sure you have plenty of meat on the bone for whatever deal you find so that there’s always an exit strategy.

Beware that if a heloc gets to 10%+ (which looks more possible than it once did), your monthly payment on a fully-extended interest-only loan at the max borrowing amount you described above would be $2667.  If you have the means to cover that payment for an extended time, then you may also be positioned well to buy properties if the housing market corrects (which appears to be very possible in the next year, even if not certain). 

If you’re not in a position to cover those payments (either through other income or with heloc proceeds themselves, set aside for reserves), then I would definitely not use your heloc for anything long-term.

In all cases, but particularly if you’re going to rely upon the heloc as a source of reserves, beware that helocs can be frozen and sometimes called due immediately if the bank so chooses in an economic downturn (note that this may impact your cash reserve position if you plan to depend upon the heloc for reserves). Read your closing docs carefully and ask good questions.  Sometimes, they also require periodic re-verification of your ability to pay, which is when they may be most likely to be called or frozen.

If interest rates get as high as they did in the early 80’s (which seems a less ridiculous possibility now than it did 6 months ago), you can expect to nearly double the monthly payment above.  

Finally, if you're planning to leverage properties you buy, your heloc (at the adjusted rate) will factor into your DTI for borrowing on new properties. A HE loan would be a good option for a fixed rate, but it's sure to be at a higher monthly payment than a current heloc (but perhaps a good bit less than a future payment on a variable rate).

I’m actually not suggesting that you shouldn’t use a Heloc in this environment (I use one!)—only that the type of investment and risk should be very carefully measured (and especially if you lack significant cash reserves to weather a storm).

Again, you have quite an opportunity to do something with that amount of cash; I’d just start slowly and educate yourself at every step of the way.  Assuming you understand and have a game plan for the risks, then go for it!