The evolution of real estate investing has made financing easier to find than ever before. However, that doesn’t mean investors should rush into anything without minding their own due diligence. Simply finding a loan and receiving approval is by no means the only barrier separating an investor from acquiring an additional subject property; there are terms, rates, and a litany of other things to consider. What’s more, there are several types of loans made available to investors, each of which has their own unique distinctions.
For the sake of today’s article, I wanted to discus whether or not home equity lines of credit (HELOCs) are a viable source of funding for investment properties. That said, it’s worth noting exactly what a HELOC is:
For what it’s worth, HELOCs are not all that different from your standard credit card. However, whereas the most common credit cards have no collateral, HELOCs use your home as collateral. Accordingly, HELOCs coincide with a credit limit, or a predetermined amount that you are approved to borrow. The amount a person is allowed to borrow is typically determined by subtracting the remaining balance on a mortgage from the home’s appraised value. Not surprisingly, there are other factors that lenders take into account: credit score, debt-to-income ratio, and other things of a similar nature. Upon approval, you will then be given access to a set of blank checks or a credit card you can then use to withdraw funds.
Consequently, HELOCs allow you to borrow as much as you need, whenever you need it, up to the full amount you were approved for. That means you can essentially use as much or as little as you want, and are therefore only responsible for the amount you spend.
Provided you know what you are getting into and the circumstances warrant their consideration, HELOCs are a great source of funding. However, that’s not to say you shouldn’t look before you leap. After all, HELOCS are essentially a way for homeowners to tap into the equity they have built or, if you will, a way to borrow money against it. So before you risk your own home, mind due diligence and determine whether or not a HELOC is right for your current situation.
Let’s take a look at some of the pros and cons that coincide with the traditional HELOC:
In reality, the equity most homeowners have built up is just sitting there; not working on their behalf. There is no reason you shouldn’t consider investing it to get a better return on your money. If you put the money into a subsequent investment property, you could potentially double the amount of properties providing you with positive returns.
I highly encourage anyone looking to use a HELOC to purchase investment property to carefully consider the ramifications, as you will have quite a bit on the line (your home). Having said that, HELOCs can be a viable source of funding for an investment property provided you have done your homework.
Consider yourself a candidate to take out a line of credit against your equity if you are absolutely positive you can pay the balance in full at the time it is set to expire. If you are confident that you can flip a property and receive your payment by the time the HELOC expires, tapping into your home’s equity can be a viable strategy for real estate investors to consider. Consequently, I advise against using a HELOC if you have any uncertainty at all. There are too many viable financing alternatives to lock yourself into a HELOC without the confidence to pay it back by the time it expires.
To reiterate, a HELOC can provide you with the funds you need to flip an investment property. However, you should only consider taking out a line of credit against your equity if you are absolutely sure you can pay back the debt by the time it expires.