HELOC on Investment Property

[Risha Walden]

I have an investment property that currently does not have any mortgage. I would like to open a line of credit on this property but the first 1/2 dozen places I have called, have done mortgages with these banks in the past, say that they will not give a HELOC on an investment property. Any advice? Is it not possible to get a HELOC on an investment property? I was listening to a podcast from BP recently, might have been an old podcast not sure, and the strategy the investor used for investing was taking out HELOCs on his properties once the mortgage was paid off. Hard to believe that his strategy is based on something impossible.

[Justin R.]

@Risha Walden I think the desire not to have a mortgage is what's making your life harder than it needs to be here.  A better approach, IMO, is to take the long term mortgage debt and invest the capital in another asset that you can borrow against as a line of credit.  In my case, that other asset is municipal bonds from my state.  Others do it with whole life insurance.  Pretty much all the sophisticated investors I know are doing this in one form or another.  End of the day, it means I'm earning ~3.75% on any extra cash I have lying around in the bank ... plus an arbitrage, depending on the current state of interest rates and the bond market.

In short, it looks like this:

1. Take out a 30y fixed mortgage on the free-and-clear property for, say, $200k.  Assume this is at 5%.

2. Buy $200k of, say, NJ municipal bonds with an effective yield of, say, 4.8%.

3. Open an LOC against the bond portfolio. You should be able to borrow up to 80% of value, with a rate of, say, 4.5%.

4. When you need some capital, write a check from your LOC account.

Beyond the value of flexibility, you also get to write off the mortgage interest expense as a business expense, and the income from the bond portfolio is state and federal tax free.  Lots of variations on the general strategy, including using T-bills, whole life insurance, and other assets, depending on variables in your life.

End of the day, it's essentially always a missed opportunity not to take a FNMA-backed fixed rate mortgage if you can get it.