How to invest with $560k HELOC

Question

I checked with my bank and I should be able to get a new $560K HELOC on my primary home. I would like to get some advice from BP about the investing strategy using the HELOC. I am in 40's and pretty busy with my current job, so I do not have time to spend too much time fixing the houses. My local market is strong, but it is not in metropolitan areas. SFHs and town homes are more common here than multi-family or apartments. I have already had invested in 2 townhome properties with my own capital. and the gross yield is 5-6%. With my new HELOC, I am not sure if there are other options I can do to earn a higher gross yield, say 8% or above on the purchase price. My HELOC rate is prime-0.14% i.e. 4.36%

How would you invest if you are in my situation?

Ivan Barratt · Answer

@Tony C. remember the advice: "Don't bet long term with short term money."  In the last crash HELOC rates rose above yields for many so called, home rich "investors."  It's a sure fire way to lose your ass(ets). The "carry trade" is sexy until it destroys your balance sheet.

Short term, high value add deals that you can refi would be my strategy although in most cases  I wouldn't risk my home to do it.

If you can live with a permanently higher payment then do a cash out refi and keep your powder dry for the opportunity with solid yield.

If I sound like I'm speaking martian right now then don't move forward! :)

Steve Vaughan · Answer

Gotta keep in mind taxes always. Taxes are our largest lifetime expense.

Lending and flipping (if you profit) will give you additional ordinary and interest income to report. If I was already a high w2 earner, that would not be my goal.

For a more passive approach but still with potential tax benefits of long term ownership I would probably invest in an outstanding sponsor's syndication or NNN commercial leases.

However, if the only capital I had was borrowed from my home, I would address that issue.  Not having your own savings is a symptom of a much larger issue than how to maximize the delta of leveraged funds from your own house.

Shiloh Lundahl · Answer

@Tony C. I agree with what has been said. Starting a post like this will usually get you some people contacting you with possible deals. And I like what @Tim Puffer Stated that you are only as strong as those you partner with.

My experience has been that your return on investment correlates with your involvement in the process. The more hands on, the higher the return is generally. The more passive it is, the lower the the return will be. That is just a general statement.

I also agree with choosing investments that fit your lifestyle. I think hard money lending would be awesome, I am not at that point yet, but I have worked with several of hard money lenders and I know that if you do hard money lending that you will need a system and guidelines to guide your lending decisions along with enforceable legal documents in case things don’t go as planned you can foreclose and take back the property to recoup your investment.

Turn key rentals managed by an honest turn key company could be a good avenue for you but you will need to vet the company and manage the manager.

Buying performing notes is also more of a passive investment that could get you maybe an 8-9% return. But you will need to take time in learning the note business and how to choose notes wisely and what to do if they become non-performing.

Being a debt investor in large syndicated deals could also be more passive and if you get into a good one you could get a pretty good return of 10% or more.  Or you could be a debt investor on non-syndicated deals and depending on the investment earn over that 10% also.

It all comes back to developing an investment strategy around your lifestyle.

Tim Puffer · Answer

@Tony C. - "DONT do this with NEWBIES or people hitting you on the internet talking a great game.. you need to belly to belly and make sure your aligning with top shelf experienced players.  you will no doubt get PM"s from many pitching their deals.. when you make a post like this on BP.. its just like internet dating you have no clue who your talking to.. and just being on BP is not an endorsement of anyones bona fides..

Those words by @Jay Hinrichs will save you from getting into bad deals with possibly worse partners. You are as strong as who you partner with.

There's so much in REI that you could do with that money. It all depends what fits in best with your current lifestyle, or the lifestyle you want. I invest in self storage due to the good returns and the nature of the business.

Ultimately you may end up trying a few different avenues until you find the one that you like best!

Jay Hinrichs · Answer

Hookup with a very good and experienced local broker that you can talk with in person.

I have had two hard money companies.

my company in the late80s and early 90s was all investor driven  IE 100% of our loans were funded by folks like you.

my second stint my funds were personal cash and bank LOC's.  we made far more money on the later .

but enjoyed building that monster investor data base..  we had about 50 million out and that was 250 investors.

pretty sure you will find like kind companies in your state no problem

then just look at loans they present you and make sure they make sense.

DONT do this with NEWBIES or people hitting you on the internet talking a great game.. you need to belly to belly and make sure your aligning with top shelf experienced players.  you will no doubt get PM"s from many pitching their deals.. when you make a post like this on BP.. its just like internet dating you have no clue who your talking to.. and just being on BP is not an endorsement of anyones bona fides..

Jay Hinrichs · Answer

those funds for short term high yield lending could be appropriate..

in reality that's how most HML companies work they have some sort of LOC  at a rate in the 5 to 6% rate and they loan at 10 to 15% apr and make the delta..

now with 450k that won't exactly changed your lifestyle but it could bring you in an additional 30 to 40k a year with mitigated risk and no risk to tenants..

Most on this site will suggest you leverage up and buy rentals.. and that is great if you want to be in that field.

The BRRRR method would be a good one if you want to do value add rentals.. that could work pretty good for you

John Leavelle · Answer

Howdy @Tony C.

Here’s my answer to your questions about BRRRR strategy.  Yes, you could do it without the Rehab portion.  It’s called Delayed Financing.  Purchase property with Cash (HELOC).  Then Refinance the day after closing for your original cost.  Payoff HELOC.  Do it again.  With the BRRRR Strategy your returns will skyrocket if done correctly.

I currently only do BRRRR deal (including Rehab).  I do not do any of the repairs.   I am too busy with my W2 job to do much of anything.   My Realtor, Property Manager, and General Contractor do most of the physical and leg work.  I just manage the Managers.

Ian Ippolito · Answer

@Tony C.,

To answer your question, there are a lot of things that you can invest in that will give you a much higher rate of return. However, all of them come with risk. ( especially if a severe recession hits). And it’s one thing to lose money. It’s  another to lose money and the roof over your head.

For example, several people mentioned hard money loans. You could put the money into a hard money loan fund (assuming you’re an accredited investor).  That could yield anywhere from 7% to 12% or more, depending on the risk you’re willing to take.  Sounds great as long as it’s working.

However, if you look at the performance of leveraged hard money loans in last recession ( which is essentially what you’re doing)…many of them imploded.

So if you’re lucky, maybe everything ends up fine. And if you get unlucky, you end up defaulting  and losing your house. Personally, I wouldn’t risk it.

Also, 5-6% gross yield  in a non-city environment doesn’t sound very competitive at all for single-family home rentals or multi family. What is your net yield?  May be a better/safer alternative would be to sell those assets and redeploy them into something that has a higher/more competitive yield.

Tony C. · Answer

@ Joe Villenueve I have not finalized the HELOC terms, but it seems to be quite flexible with no minimum payment and 20 year pack back period.

Tony C. · Answer

I have seen a lot of good advices here. I consider myself a risk adverse guy and I am only looking for stable income. Having said that, I knew I am not effectively deploying my available resources so far by keeping debt free and leaving all my home equity 100% idle. I am earning a decent W2 salary and generating some rental income from the 2 fully paid townhome properties. Therefore, I believe I should be in a position to leverage up my balance sheet, grow my real estate portfolio and generate more passive income. The HELOC rate is lower for me now, but I may consider changing it to HEL to fix and lock the rate.

The big question remains what and how to invest. Personally I still like to buy residential rentals like SFH or townhomes in the local market. I do not have time or skills to rehab the house, so I guess I have to buy properties in good shape. The con of this strategy is I am only getting 5-6% gross rental yield. The pro is that it does have tax advantage due to depreciation accounting. Also is it true that I can make up the low yield by growing the rental units thru refinancing as total income or asset value increases? Does BRRR without "Rehab" still work as a strategy?

I am also interested in other ideas which I believe I can generate higher yield, e.g. apartment syndication, crowdfunding, HML. But I know I need to find good reliable partners or vendors.

How to invest with $560k HELOC

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