HELOC for Investments - Good or Bad Idea?

[Jason Crow]

My wife and I own a house and land worth about 1 million, free and clear. We are in a hot market in the Austin area. We have previously flipped homes and owned a few rentals prior to the housing crash. I decided to get my real estate license this past year so we could get back into it. When we got out of the industry, we invested in a new business that is still running and profitable. There is still a note on the business though. We have paid off pretty much all existing debt we have, sans the business. We want to get back into flipping and rentals, but want to avoid hard money or investment loans, if possible. I have spoken to a few lenders and financial advisors and HELOCs have come up. My idea is to take out a line of credit against our home, so we can purchase properties with cash, rehab, and resell. With the funds, would pay off the draws against the LOC and then set aside remaining cash so we can eventually build up a war chest big enough to not have to utilize the LOC. I am curious what the thoughts are on this approach. What are the pitfalls? Advantages/disadvantages? Has anyone utilized this strategy? Interest rates are low, I could avoid constant closing costs with investment loans over and over, and the cash would feasibly make my purchase offers more attractive. The other idea I had was possibly using the equity in my business (we owe about 650k, it's currently valued around 1.6-1.7 million). The business is land and a brick and mortar building. I think my dilemma might be that a small portion of the note (200K) was provided by the SBA, so they may have some sort of guidelines restricting us from borrowing against the business. Anyhow, feedback on if that is a better approach than utilizing my home.

In another thread, someone mentioned also doing a refi/cashout for long term holds which would pay off the draw as well. I am aware of the 4 loans issue. However, we previously ran our flipping business under an LLC and would very likely look at a portfolio lender should we decide to go that route. I am more just curious if that scenario is also plausible, as the OP never posted what came of his situation.

Thank you in advance for any advice or feedback you can provide.

Jason!

[Thomas S.]

The nicest factor about a HELOC is you only pay on what you use and you only have to pay the interest not the principal. This keeps your carrying costs very low on flips.

You need to view the equity in your home based on it's true cash value.

1M is, if valued at a 10% return by investors, worth $100,000 per year in opportunity value. That is how much it is costing you each year having it lying dead in your home less what mortgage interest would cost. If you borrow through a HELOC at 4% you automatically should be gaining 6% as opposed to losing your present 6% return on your own money. Assuming you can invest it having the expected minimum 10% return.

To me using a HELOC is a no brainer that every investor should be taking advantage of with todays low interest rates.

Regrettably equity is where cash goes to die.