Posted about 4 years ago

Home Equity Investment (HEI) over Home Equity Loan (HEL) & The HELOC

Home Equity Loans & Lines of Credit

We have all heard of home equity loans and lines of credit. But have you heard of Home Equity Investments? The advantages of the Home Equity Investment over the Home Equity Loan and Line of Credit are many. Recently ran across a fintech company that was offering Home Equity Investments. I also had a colleague leave his mortgage company about 4 or 5 years ago to go to work for another company that offered Home Equity Investments. I thought is was a unique offering back then, but there was a very limited market for their limited program. The company that I recently encountered had a much better offering that would appeal to many more Real Estate Investors and home owners looking for funding.

Let me explain how Home Equity Investments work. To do so, first I want to explain Home Equity Loan works. Simply a lender, usually a commercial bank, will make a loan, usually a second mortgage, against the equity in your property. The Home Equity Loan is a fixed loan amount, with a fixed rate, for a fixed period of time. Therefore a HEL is a loan against the equity in your property. For a Real Estate Investor a home equity loan is a good way to get cheap money to use to invest in real estate if the investor lives in a home with substantial equity that they can use. Even better than a Home Equity Loan is a Home Equity Line of Credit, or a HELOC. The HELOC, is a line of credit versus a loan and has the advantage of no payments or interest charges when there are no funds in use, plus the investor can use funds pay them down and use them again. Effectively, have funds to use and not paying for the use of those funds if they are not in use.

Home Equity Investments

A Home Equity Investment is neither a loan or a line of credit. It is as the name implies, it is an investment. With a Home Equity Investment there are no monthly loan payments and there is no fixed rate of return. In essence the home equity investor, is making an investment based on the potential growth in equity of the home they invest in.

With a HEL the borrower and the lender know exactly what the cost to use the lenders money is. With an HEI the cost is a percentage of the appreciation of the equity in the home. For instance if the home appreciates $100,000 in value from the time of the equity investment the investor would receive a percentage of that increase in value as the return on their investment, at the time the home is sold or refinanced. With any equity investment, there is the risk of the investment losing value. When an investment loses value it depreciates. Therefore the home equity investor has a chance to lose money.

This may seem a little complicated and risky for the homeowner (Real Estate Investor) and the home equity investor, but there are reasons why a Home Equity Investment might be a great option for a Real Estate Investor.

Three Advantages of a Home Equity Investment

1. Greater Cash Flow: there are no payments, because an HEI is not a loan. The Real Estate Investor can access money from there investment property or owner occupied homes without sharing cash flow, but by sharing equity growth of the property.
2. Fewer Qualifications: the Real Estate Investor is not qualifying for a loan and there is no underwriting the investors ability to repay the loan. The underwriting is based on the soundness of the real estate, the equity and potential appreciation of the equity. No income requirements and much lower credit requirements.
3. No Occupancy Requirements: The property does not have to be owner occupied or even tenant occupied. This gives the owner occupant the advantage of using funds from the Home Equity Investment to repair the property, find a tenant and create a cash flow without making payments or the property meeting higher property conditions standards.

The Disadvantages of a Home Equity Investment

1. Potential to Pay More: If the property greatly appreciates in value, you will pay more than if you had a HEL or HELOC. But as an Equity Investment the investor and homeowner shares in the appreciated value and they may share in the depreciated loss. To way risk versus reward, consider there are no monthly payments.
2. This is New: Home Equity Investments have been around forever as a private investor may share in the appreciation of a real estate investment. This is new to the extent that the HEI is now an institutional investment not just from a private person.
3. Not Available Everywhere: As an Institutional investment it must be approved by each state the HEI does business in. Currently, these are the only states the Home Equity Investment is offered CA, CT, OR, WA, MA, CO, NJ, VA, DC, FL, NY, MD, PA,
IL, MN, MI, AZ, NC. The property must also be in an urban or suburban area. The program is not available in rural locations.
4. Limited Property Types: these are the only property types the that are eligible for the HEI SFR, Townhome, Condo, 2-4 unit whether owner or tenant occupied or even vacant.

Home Equity Investment or HEL or HELOC

There are advantages of each program for Real Estate Investors. Any Investor with substantial equity in real estate and they need funds to help build their business, there is no one right option. Weigh the pro's and con's of each option and make an informed decision. HEI is another financing tool in your real estate investment business arsenal.