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

Question

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

William Joel Idleman · Answer

You can use that strategy but it's getting complicated quickly. The more complicated things get the more you pay your attorney and tax preparer.

Have you considered borrowing from your retirement accounts?

Chris Davidson · Answer

@David B. Why not buy it 100% on LOC pay down with rent and REFI it down the road to free up the LOC again. The issue I see is thinking the LOC will be at 4.5% for 5 years. If you have one that is great go do it. However I think you overcomplicated it. If your LOC is interest only at 4.5 your payment would be ~850/month on 250k. If you are making 2k/ month in rent net you are good to cover that and pay down the balance. At this point your COC is infinite as you had no cash in the deal. This is how I do most of my investments, and once you get to a point where you want to REFI you can or just roll it if the LOC has better terms.

It isn't the fastest way to scale, but it is a pretty safe way as your debt service is low and cashflow is high.

If you want to dive deeper into it DM.

It isn't the fastest way to scale, but it is a pretty safe way as your debt service is low and cashflow is high.

If you want to dive deeper into it DM.

Sergey A. Petrov · Answer

I am confused here… you are your own “bank” if you use your own money. Why would I charge myself interest on my own money - withdraw $100 from my checking account A, deposit that $100 into my checking account B, then have checking account B write a $110 check back to checking account A?
What you are describing is nothing different than a pure downpayment + financing acquisition. It is just that your financing is from the existing line of credit (not your money) borrowed at 4.5%

Andrew Garcia · Answer

Hi @David B., the issue with this is scaling. Will you always be able to put down 50% of your own money?

Also, in your scenario, if you were to use the LOC as a 50% down payment and your other loan was at a 7.5% interest rate, you would have a blended rate of 6%.

Financing the other half with a mortgage would only increase your monthly payments by around $875. You would still be cashflowing $15k per year with none of your own money invested.

Then, put that $15k as well as $10k of your own money towards the LOC. That lowers your monthly payments since you will be paying less interest so you do not have to put the full $10k in subsequent years.

In 5 years, you paid off the credit line with $50k of your own money rather than $125k. That brings your cash on cash return to 50% annually.

You could even put no money in and just use the credit line but then you would be having it open for longer.

Hope this helps! Let me know if I can be of any assistance.

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

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