Velocity Banking Question

[Abner Castaneda]

From what I have seen it seems that velocity Banking is quite controversial. 

I understand from a savings aspect that it won't be much of a difference to use a LOC compared to an extra mortgage payment, but is there any legitimacy to the following example:

You paid off the entire balance, now you can use the heloc to buy a cheap rental property. Say it's a 150K limit and you use 50K to outright buy the property and whatever you need for rehab. Repeat the process of paying it off then get another one. 

[Brady Mullen]

IMO, using leverage is a matter of timing when you want the income from a portfolio.

For example, the more leverage you use, the more your returns will be (assuming you hold long enough to even out fluctuations) because appreciation on your leveraged property will usually provide more wealth than any other element in real estate investing.  If you put 10% down on a property, and it appreciates by 10% (let's say in 2 or 3 years), you've doubled your wealth.  You'll probably have to subtract from that gain some negative cash flow (10% down may make cash flow off the bat tough), and you can add some back in for tax benefits and debt reduction, but the wealth on your balance sheet grows fastest this way.

This is not to say 10% down and negative cash flow is good. I'm just saying that leverage and appreciation are the source of most wealth creation in real estate. So if you're aggressively trying to build wealth and you have a steady and healthy source of income in your life, keeping your LTV as high as you can afford without taking uncomfortable risks will build wealth faster.

Someday, however, you'll want to optimize for income.  In almost all cases, the best income scenario is a paid-off property.  Your overall returns will be less because the leverage is gone, but that will matter less when you're most interested in receiving monthly checks.

So often people get excited when they achieve some nice cash flow from a property they purchased a few years ago, and their instincts tell them to leave that alone.  Of course, if they need the income, that is exactly what they should do.

But if they don't need the income anytime soon, they should probably use that "stale equity", raise the LTV on that property with a refi or LOC, and go acquire more.

If they do this, they will give up that $1000/mo (more or less), but they'll have two properties, and the income when they do need it will be much higher than it would have been otherwise.