All Forum Posts by: Rick Hart

You've got to see the big picture and drill down into the details. Lets not miss the point of just how flexible a 1st lien HELOC is...

1. Turn it into a high return savings account, earning as much as the interest rate saved on the HELOC. Think of it as a temporary storage area with full liquidity any time you need access to it. "A penny saved is a penny earned".

2. Turn it into a high velocity home payoff instrument...reduce your payoff time (from 30 years to ~ 10 years with the cash flow alone). Put your cash flow right back into the HELOC and save yourself a boat load of interest costs and buy yourself 20 years of financial freedom. The HELOC is recast every single day, what does this mean to you? It means that as you pay down the balance on it, you increase your cash flow exactly in proportion to the daily interest reduction (try to do that with a mortgage). As you continue the paydown, you *continually increase your cash flow* until the point where you completely pay off the property which will be the maximum cash flow point. You shouldn't have to wait for 30 years to see any increase in cash flow...that's absolutely ridiculous! Go right now and open up the calculator's here on biggerpockets and what do you see in the analysis? At year 30 you see a huge jump in cash flow. You don't have to wait to receive the benefit of your own equity! Please tell me whether or not you can clearly see this.

3. Turn it into an interest only loan...don't pay anything toward principal at all, just tread water. This is a good strategy in economic downturns as it allows you to maintain margins of solubility on your properties. Think of it as an insurance policy.

4. Turn it into a reverse loan (think: reverse mortgage). If you've got an alligator property but just know its value will appreciate significantly following a downturn in the market and want to buy time...take out your interest payment from the HELOC to make the minimum payment on the HELOC! (No, really you can do this). This has the effect of adding your interest payment to your outstanding balance. Obviously you don't want to have to use this method but its there if you need it and after the economic storm ceases you can make up for it. This would be used for properties in very desirable locations that have huge appreciation considerations.

5. Some HELOCS offer high LTV (loan to value) amounts (up to 90% LTV) and they don't have PMI to bite into your cash flow. So if you want to use a 10% down payment without reducing your cash flow, you might want to look into this option. I understand PMI (private mortgage insurance) is pretty much standard on mortgages with anything less than a 20% down. This means PMI will cost you anywhere between $100 to $300 per month in cash flow.

Do you not see the possibilities of lines of credit? Imagine in 2006 and you were in lines rather than loans. Then in 2009 the housing bubble burst, real estate prices took a dive, rents came down and your cash flow suddenly disappeared and you owned a once $800K property that is now worth $550K. But you were smarter than "the crowd" and quickly paid down debt on your LOC to $550K, still had positive cash flow despite having to lower your rents because unlike the guy with a mortgage, you had options, a competitive advantage in the market because you could always just press the pause button by making the interest only payment until the storm passed. I'll bet if people did this back before the crash of 09, you would have cut in half the foreclosure rates across the country and that's being very conservative.

I'LL BET NOBODY WILL READ THIS THAT WON'T GO AWAY CHANGED BECAUSE OF IT!!!

Take a scenario in which we completely go though a real estate market cycle...you know, the ups and downs. You've got a number of rental properties financed as first lien HELOC's (no mortgage). In a booming economy you have properties cash flowing positive. You take all of the tenants payment (which consists of PITI + your cash flow) for any particular property with a HELOC and turn it against the balance of what is owed on the HELOC (pay the taxes & insurance out of the HELOC via auto pay at the appropriate times...completely automated).

What has just happened? First of all you have reduced *your monthly HELOC payment due*. Let me say that again, you have reduced your minimum payment due on the HELOC (and will continue to reduce it more and more over time). This increases your cash flow on that property and we know the only smart things to do is either keep putting your tenants check into the HELOC (to save tens of thousands on interest charges) or to acquire still other properties.

Now along comes the recession in the market and you have all the flexibility and security in the world to weather the storm. Lets count how many options you have...

1. The least amount you have to come up with to not lose your property is an interest only payment (can't do that with a mortgage and you might not be able to do a cash out refi in a down market on that mortgage either).

2. You have prepaid principal by the amount of your cash flow. You now have forced equity built up in your property and have probably saved yourself tens of thousands of dollars in interest cost compared to a 30 year amortized mortgage.This is a fact because I have seen it and done it!

3. Not only do you have the option for an interest only payment, that interest only payment has automatically decreased over time as well (your cash flow reduces your principal balance which reduces your interest payment) HELOC's recast themselves every single day.

4. If needs be, you can actually take the payment due on the HELOC, out of the HELOC and make a minimum payment back to the HELOC and satisfy that requirement (not recommended for obvious reasons). Pretty clever huh? Your objective though is to always pay MORE than the minimum. You want to work down that balance! I only mention it as a absolute last resort.

Over time you will significantly reduce the term of your debt by the amount of your cash flow going toward principal. Typically turning a 30 year term into a 5 to 10 year debt. At payoff your cash flow has maxed out and you have increased your velocity of wealth creation. But wait! there's more. LOL. Your property has also been appreciating as well as rents. You have also taken advantage of the tax laws to pay nothing in taxes.

I really don't see much risk working this strategy along with BRRRR to accelerate your path to wealth.

Your HELOC serves as a holding tank for any future purchases while it saves you significant interest in the process (a return in reverse). I realize that you want to have as little out of pocket as possible when purchasing properties (to minimize your risk) but at the same time if the markets ever turn south you won't be over leveraged (or am I seeing this thing clearly). I've just started this game of REI so any advice would be appreciated. Something tells me I just might be missing a piece of the puzzle here.

"you will have a tool that can be used for many years, all without having to re-qualify for a new mortgage every time you need some money".

After all, equity is your money. Why should banks get to leverage it when you should be. In a mortgage its trapped and can only be accessed at a significant cost...forget that. As long as a person uses their equity to put money into their pocket and not take money out of their pocket, you can build equity and wealth. I really believe that the HELOC is the other bookend along with buying cash flow rental properties that will give people a fighting chance at building real wealth. Without the HELOC equity building strategy, you are doing OK but still have a sizable leak in your bucket of water and the banks are there to catch every drop.

Yes I have. I started it (RYM) about 2 years ago and have taken a $125k property down to a $75k remaining debt. It works if you have discipline and of course a decent positive cash flow. As a matter of fact it gave me the incentive to find every way possible to reduce needless spending and significantly increase my cash flow, which I did in spades. In total transparency I would have to say that financial institutions who sell a 1st lien HELOC are not very eager to work at giving you the necessary tools to work the strategy. I can direct deposit into the HELOC and write checks to pay bills, but I still need a checking account to transfer money electronically instead of what I really want to do which is to set up auto pay directly from the HELOC itself. They seem to be dragging their feet on implementing that feature.

What you're paying for in RYM is the necessary training to understand the process, the bank lists who provide 1st lien HELOC's and a support group to answer and navigate the process. Whether or not that commands a $3k price tag is up to each individual to decide. It was worth it to me.

So what the idea would be is this...purchase a rental property and then funnel it's cash flow back into its 1st lien HELOC (no mortgage here) to quickly build up equity in it, reduce its monthly payment, and provide future funding for another rental property or continue with the rapid payoff schedule if you don't want to get over-extended. This would, I believe, provide a rock solid foundation of security and low risk (a steadily decreasing minimum payment and having access to your equity when you need it). Furthermore, a HELOC in 1st position would not likely be frozen in an economic downturn. The reason banks freeze HELOC's is because they are generally in the 2nd position behind a mortgage which makes them very vulnerable to plummeting home prices since the mortgage has first dibs on any sale of the foreclosure of the home and this leaves the HELOC lender SOL. The HELOC interest rate is generally higher than a mortgage in a good economy. In a bad economy I think I remember it's actually lower but not sure about that. I'm surprised in looking through the forums here that nobody has really dissected the HELOC the way I've seen it done elsewhere. There definitely are many advantages and a few disadvantages as well but very worthy of further discussion. It's curious to see that both a mortgage and the government run 401k's are designed to keep you from having access to your own equity/money. I can't help but think this is by design and at the detriment of the consumer...go figure. They just want to hep U.

I have been brainstorming what I believe would serve as a dual strategy to play the rental property game the right way. Combining a 1st lien HELOC in lieu of having a mortgage. The advantages of a HELOC over a mortgage are not obvious at first glance. It's in the finer details where it shines. True, you can achieve basically the same amount of interest reduction and save many years of time to debt elimination through both the "send in extra payments" strategy and by having a 1st lien HELOC but having the equity available (considered seasoned) at any given time to jump on a distressed property as well as combining many advance strategies such as offsetting HELOC interest onto 0% CC's, using 401k loans, bonuses, inheritances, letting property taxes, insurance payments, savings, your checking account cash sit in the HELOC to work down its balance until any payment is due is very beneficial. The minimum amount due on the HELOC works itself down lower and lower as time passes unlike a mortgage where the payments are the same regardless if you make extra payments or not. This provides security knowing that you can always fall back on this minimum payment in hard times. In a mortgage, your money is trapped once it goes in and is expensive to take out. Has anyone actually practiced and combined the two methods above? I have two properties where one does not have a mortgage but only a 1st lien HELOC and it has been phenomenally effective. The other is a mortgage at a 3.625%, 30 year fixed. This should be a really good discussion!

I know this strategy *very well* because I've been doing it for years. The confusion all stems from people's inability to understand amortized interest. Keeping it very simple...think of time, balance, and interest rate or you will very quickly take the first wrong turn that leads to that crazy neighbor that shoots randomly at people who dare drive down his road.

The HELOC strategy is basically making extra principle payments on the debt and at the same time remaining liquid with your available equity. The 2nd part is why you have to jump through a few extra hoops. Forget everything you think you know about a percentage of return vs amortized interest, you will not even be in the same town let alone the ballpark. In an amortized loan you're just not paying 4% interest, you are paying 4% interest FOR 30 YEARS, front loaded. Let me give you real numbers to make it clear (use any amortization calculator that has the schedule attached)...a historical average of 6% interest on a 30 year loan of $200k. You make a $12k principal payment from the HELOC to the mortgage. With a $2k cash flow you will have paid the $12k completely off in 6 months. How much did you save on mortgage interest? $46,785.93 mortgage interest elimination! Plus 4 years of debt elimination (30 yrs - 4 yrs = 26 years of pending debt). The HELOC debt will have cost you $1,260 EVEN AT A 21% HELOC INTEREST RATE. It's all about the time, balance, and interest rate.

So what is your yield on that! My God, people will not listen to reason and are almost completely illiterate in financial matters. I blame the school system for not teaching people this and the banks and government for making fools out of the whole lot of us.

This technique really is the biggest no brainer in history. I have many more advanced techniques to freely give to anyone without cost, without selling anything to anyone. I just want to help people.