How to start investing with a fully paid for house

Question

Hello, I have a large house that is fully paid for in a wonderful area. I make enough money to keep things running and get by, but not enough to really set aside to invest in any great quantity.

My wife and I are somewhat young...35...but I realize time is getting short, and I want to start accumulating wealth. I have this house as a great asset, and I realize I could leverage it to start investing in other properties, but I have some concerns. My biggest concern is using the house as collateral, removing the "paid for" status. It frightens me, as most people say "leave it that way".

Any thoughts?

Edward Burns · Answer

I know quite a few are recommending to take out a loan against your current house.  Based on the tone of your initial post, I strongly suggest that you do not.  Yes, I know money is cheap right now, etc. but your peace of mind is worth more.  I would save as much as possible over the course of the next 6 months or a year while reading and learning everything you can about REI, Then look at buying investment properties.  You sound uncomfortable in risking your families home, so do NOT.  Also take steps to insure that your home is separated and protected from any REI or other investments you may enter into.  Talk to an attorney specializing in estate planning and real estate investments for the best way to this.

David C. · Answer

@Bryan L.   I stopped my explanation before I got to bankruptcy for the same reason, I don't know how that all shakes out.

How 'unsecured' is 'unsecured'?  If you'd have to declare bankruptcy, chances are you'd avoid that by taking out a HELOC or selling your house to avoid it, right?

So... once you have some assets, you may as well use them as collateral, because they will come after them anyway?

I'm sure someone here can explain - but NOT PROVIDE LEGAL ADVICE.

Q: What if you have assets and unsecured credit that you do not have the cash flow to pay?  can you be compelled to sell assets to satisfy the unsecured debt?

Bryan L. · Answer

@David C.  - you make some interesting points.  I have (and use) both secured and unsecured debt.  Another thing to consider is the bankruptcy laws.  I don't know the answer to this, but can the unsecured creditors force me to sell my house?  Can they force me into bankruptcy?  Let's say for example that I have only one flip going at the time, and I have it financed with credit cards and unsecured lines (nothing on the personal residence HELOC at the time).  So personal residence is free and clear.  And if it gets that bad for some strange reason (or sequence of events), what happens?  I also have mortgages on my rentals.  Obviously, those banks can foreclose on the rentals.  Nobody can foreclose on my personal residence since the HELOC has nothing against it, and all my rentals are with different banks than the HELOC.  So, things get really bad for whatever reason.  If you wind up in front of a bankruptcy judge, are they going to just let you keep your free and clear personal residence when you owe hundreds of thousands on rentals and unsecured?  I have no idea, and the answer may vary by state.  Update after posting - Here's another thought.  If you list that free and clear personal residence on your personal financial statement at the time of loan application, I think you are ethically obligated to sell it to repay the other debts (such as rental mortgages).  But unsecured usually doesn't ask for a personal financial statement.

David C. · Answer

@Bryan L.  - I'm surprised but I find myself disagreeing with the obligation to sell your house to pay off unsecured debt.

Whoever loaned you 'unsecured' - presumably demanded a higher return for the risk that you might get sick, and you were unwilling to put up your house as collateral, so they are stuck waiting until you can pay.

If you are willing to sell your house to repay unsecured debt, then get debt secured by your house, it will be cheaper.  And the only cost is being honest with yourself.

I have flipped on the issue of people walking away from mortgages, the more I've learned about how the market was gamed by the banks and people were encouraged to stretch thin - and thinking through the logic of 'secured debt' - the banks were making loans with their eyes open: they get paid x%, if not getting paid, they can take the asset.  If you walk away when prices plummet, you are living up to 'option 2: give up the asset'.  If you try to not pay AND not surrender the asset, then you are violating your ethical requirements, so people who hire lawyers to slow down foreclosure, or play other dirty tricks - they are showing unethical behavior, but simply doing the math and living up to 'option 2' feels less and less like 'bad ethics' to me.  Or maybe I'm just losing my ethics.

J. Martin · Answer

IT ALL DEPENDS ON YOUR RISK TOLERANCE.

As many mentioned before, will you be able to sleep at night, or be constantly stressed out with a loan on your former free-and-clear property? On the other hand, it is a great way to tap wealth to buy another one. I recently wrote a blog about using cash or leverage and asks a lot of the questions/considerations that you might want to take a look at if you decide to do it. My biggest advice is RESERVES, RESERVES, RESERVES! Pentagon Federal Credit Union is doing HELOCs or HE loans at good rates in all 50 states, and you can join by donating $15 if you don't meet their criteria (I am not associated with them. Just heard good things.) Check out this blog post on using leverage:

http://www.biggerpockets.com/blogs/4579/blog_posts/32645-if-ca-h-is-king-then-leverage-is-god---loans-cash-roe-roi-and-risk

Bryan L. · Answer

@Eric Elmquist Continuing.  Anyway, we sort of just accidentally stumbled into the world of REI.  We went ahead and finished the rehab and moved in (still live there).  Before the job loss was final, I went and got a HELOC on the equity.  Starting using that HELOC to invest.  I was very hesitant at first, because the Bible says in Proverbs that "the borrower is servant to the lender".  And that is true.  But that's the "part b" of that verse, and the "part a" says that "the rich rule over the poor".  My j.o.b. career had not been to my liking and I realized that I was sick of being ruled by the rich, and that REI might be my way out.  So I finally decided that borrowing prudently was an acceptable risk to try to achieve the goal of freedom from the "rich" (j.o.b.).  I prefer to use cash or unsecured lines, but I still use that original HELOC.  Actually, I'm in the process right now of trying to get the credit limit on it increased.

Another thing to consider is this:  If you were to use unsecured lines instead of your personal residence HELOC, you are still morally and ethically obligated to repay those unsecured lines.  Let's say for example that you buy a rehab/flipper with unsecured money and then get sick or injured.  Of course, you could sell the flipper to pay off they debt.  But what if you need more money to pay off that debt for some reason?  The right thing to do would be to sell your free-and-clear house to pay the debt, even though the debt is not actually attached to your personal residence.  So, in this way of thinking (if you don't agree with me), your personal residence is always at risk whenever you borrow, even if you don't use it as collateral.  In the end, if you had too, you would sell the house to pay other debts.  But anyway, I have learned to be comfortable with the risk myself.  And for what it's worth, I'm less than 100 miles from you, and welcome to BP!

Aaron Junck · Answer

Oh yeah, I forgot to mention if you lived in your current home 2 of the past 5 years the money you get is tax free :)

Aaron Junck · Answer

You mentioned your house is large. Do you need a large house?

If your market is in a sellers market right now maybe you should consider selling your home and downsizing. Use part of the money to start investing and the other part to pay cash for a new owner occupied home.. That way you still have a paid off home. Like @Bryan L.  did when he started, a foreclosure , may be a great way for you to get into the game and gain a ton of experience. Plus if you bid on properties in cash that gives you a huge advantage for purchasing at a discount.

Good Luck!

Bryan L. · Answer

@Eric Elmquist  - I got my start in a very similar manner, and about the same age.  My wife and I bought a foreclosure.  We knew nothing at all about investing, and we bought the house to live in.  Didn't buy it because it was a foreclosure, but because we liked the house and the area.  But I had to rehab it (never even heard of the term at that time) and so we got some instant equity.  Before we could finish the rehab, I got laid off from my j.o.b.  We decided to move in anyway since the payments were the same as what we had been paying in rent.  Got to give the baby a bottle now, so I will finish this later.

How to start investing with a fully paid for house

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