Home Equity Line of Credit - What, When, How & Why
After a quick morning drive to San Antonio yesterday, I showed 15 houses from noon-6, didn't take a minute to eat or drink & I came down with a wild sickness! After a short wait at urgent care, (no flu!) I'm home in bed, browsing properties and watching Breaking Bad (first time through - So good!).
This one is for the current homeowners. I wanted to let y'all in on a secret that no one teaches us about because we don't learn about financial stuff in school or ever. Home equity lines of credit (HELOC) are crazy!
I've been going back and forth between selling my first baby rental because I have about $150,000 in equity just sitting there. I decided to explore my options, which I tend to do with spontaneous urgency.
general info I've gathered on Home equity lines of credit
A Home Equity Line of Credit is a low-interest line of credit you take out against the equity of your home.
You can only take out a HELOC on a primary residence, as far as I've been told (tell me if you've taken out a HELOC on an investment property!)
Most HELOCs will loan up to 80% of appraised value, give or take depending on the bank
Most HELOCs use the federal interest rate plus a fraction of a percent (4.5% right now, so maybe 4.75%)
When you apply for a HELOC, they take your credit and debt into consideration
When you take out a HELOC, you don't have to use any of the credit, similar to a credit card
When you use some or all of the credit, you have the option to pay interest-only payments until you pay off the full balance. This means the payments are pretty low, but you're not paying down the balance of the loan.
Some people may see this as an opportunity to buy a new car (ehhh..) or to fix up their houses (better! Adding value) but i will use it to buy real estate)
How I will personally use my HELOC
BBVA Compass wouldn't give me a HELOC on my rental property, so I decided to see what's up with my primary residence
I bought it in 2016 for $302,000 - I owe $278,000 - It's worth $425,000
80% of $425,000 is $340,000
$340,000 - $278,000 = I have $62,000 in usable equity
Since I'm highly leveraged* the bank would give me $55,000 for my HELOC
I can leave it in there and just use it when I find a deal
I will repay it as soon as I can, so that I'm paying minimal interest
I COULD use it to buy a Tesla, but I won't do that because I don't have a good strategy to quickly pay that off
Real Estate Strategy for my HELOC
BRRRR Method! = Buy with cash, Renovate, Rent, Refinance, Repeat
I will find a property in San Antonio between $25,000 - $45,000
I will renovate the property ($10,000 - $15,000)
I will rent the property for fair market value
I will refinance the property with a first mortgage. A bank will loan 80% of the value (equivalent of putting 20% down on a house)
The idea is, by buying the property right and adding value, we have improved it enough for it to appraise 20% or more than what we bought it for
Buying right for us: 75%-80% of list price depending on how well it's priced (cash helps this!)
Once I refinance, the bank will give me 80% of of the value, and I will repay my HELOC, only to repeat the process!
list price: $55,000
purchase price: $40,000 cash
renovation cost: $15,000
total in: $55,000
HELOC interest only payment: $195
hopeful appraisal: $69,000 or more
monthly rent: $1000
monthly payment with taxes and insurance: $428
monthly cashflow: $572
liquid cash of my own into the project, depending on the length of renovation: 1 month=$195, 2 months=$390
We are currently employing this strategy on a duplex in San Antonio. Since I hadn't figured out the HELOC, we are using a high-interest private money loan (I'll post about this soon). Here is a sneak peek of our sweet East San Antonio duplex!! Y'all, it's a rat hotel. But soon, it won't be!!
*highly leveraged means that I have a lot of loans out in my name, compared to my taxable income. This is good for investment purposes, but it makes it a little harder to get a loan from a bank for a residential property. This is due to the mortgage crisis when anyone could walk in off the street and get a mortgage. they are trying to prevent foreclosures!