Use myself as the bank? What do you think of this strategy?

[David B.]

Hi All -

So i've been debating how to best use a rather large line of credit I have. My goals are to invest in one appreciating asset a year (primary residence, low cashflow), and then invest in a cash flowing asset to increase my monthly income as I grow. 

My problem has been that with rising rates, and asset appreciation, I'm having a hard time finding good cash flowing deals, particularly when you consider that the credit line I have would be charging %4.5 percent interest. 

BUT WHAT IF... I used my credit line like the bank giving myself a mortgage? Rather than going and shopping for a fannie may/freddie mac loan, instead I loan myself the money, and use the cash flow of the asset to pay off the line?

EXAMPLE

Duplex - 250,000

Cash flow is 2500 a month fully rented out. 

I use 125k of my own money, alongside 125k of the credit line (@4.5 interest)

Let's say the duplex cash flows 25k (after management/expenses) a year. Rather than taking the money for myself, I use it to pay down the credit line... 

125k / 25k = 5 years till credit line is payed off. 

Now, what is my Cash on Cash for the original cash investment? 

25k / 125k = 20% ConC return. 

Let's say I duplicated this process with another property as I paid the credit line down... 

New duplex - 250,000 

Monthly cash flow 2500 

125k / 125 credit line (let's say 50% of credit line was paid down before new purchase... so new credit total is 187,500k)

NOI 25k annually.

Now combine that with the first duplex... 

50k NOI income annually. Used to pay down the credit line...

187,500/ 50000 = 3.75 years to pay down credit line. 

Rinse , repeat, rinse, repeat... until I have 4-5 assets that are producing 100k - 125k a year with no debt. 

What do you think? Pros and cons to this scenario? Here's what i can see as pro/con argument

PRO'S-

- Lend to myself at cheaper interest than a bank. 

- No mandatory debt service monthly

- Debt pay down MUCH faster than 30 year fixed. 

- Can come with cash offers to deals... maybe squeak better terms with market shifting. 

- Instant increase in income for w2 purposes. 

- my credit line isn't reported to credit agencies... so no threat to credit. 

Con's

- The money spent to acquire the asset is also money that could be used as a downpayment for a better asset. (however, if the asset isn't producing heavy cash flow, then I'm banking on appreciation for my exit strategy since I can't pay down credit line)

- No tax benefits from the mortgage. (but I can still write off expenses/ depreciation?) 

- Would be investing in more "cash flow" markets that may not benefit from appreciation as much. I've considered acquiring higher value assets and banking on the long term appreciation... but seems risky at this point (unless it's a primary residence)

Anyways.. would love your feedback. This seems to me like a way to scale cash flow very quickly by creating a waterfall of cash. But maybe I'm missing something? 

Best

DC