Home Equity Loan
how exactly do I use a home equity line of credit to invest in real estate?
I have heard that taking the equity out of my houses to invest in real estate is a great option. what exactly are the inner working of this? Won't i be having two mortgages that have to be paid from rental income? any advice and resources or links would be appreciated.
Public Comments
- I don't think that's a great option. Yes - you have have two extra mortgage payments. If you rent the property out - is the rent going to be high enough that it will cover both of these? If not, you will get negative cash flow - and then what happens if you need to make repairs? You'll have to take out more loans.
- basically, yes, so you have to make sure you can get enough rental income to cover all your payments - a 3-4 unit apartment bldg would probably be the best option if it didn;t need much work - use some of the HOE for down payment money - just make sure all units are occupied - preferably with long term renters and get a thorough bldg inspection so you don't have any surprises like needing a new furnace or roof in 6 months - make sure rent covers HOE pmt, new bldg mortgage, taxes, insurance, water, sewer, and heating you have to pay, maintenance on bldg (1% of bldg value a year), plus at least $100 per month free cash flow or $50 per month per unit - anything less than this and it could wind up costing you in the long run
- That is a questionable idea in a great market, but in today's real estate market it's a very bad one. Banks have started to call in home equity lines of credit because homes values are dropping. The last thing you want to do is to lose even a little bit of whatever equity you currently have in your house. Rather, you should be building up that equity by paying off the loan. Many many people have had to go into default because their homes are now worth less than what they owe on them and the bank has called in the difference. There is also a growing glut in the rental market due to the fact that a lot of people who would like to buy homes can't. Also, a lot of people are renting out their homes because they can't sell them. What you're talking about is risky financial juggling, and now is definitely not the time to be getting into it. Experienced property jugglers are getting out of the biz in droves.
- Bad idea. You would be gambling your primary house, your home, on some real estate investment. Suppose you get a tenant who doesn't pay for a month or two? Or you can't find a tenant to rent the place? Now if you took it slow, and saved up the cash to buy your first real estate investment, then you wouldn't have to risk as much.
- Maybe 3-4 years ago, and I know people were doing it, but you do have to look at the entire picture here. First, a home equity is not a great long term option, it's more of a short term solution to a cash flow issue or emergency home repair issue. Yes, you will have two mortgages, thus two mortgage payments. Home equities, especially lines of credit do more harm than good to your credit score. It is possible to find a line where you can lock in the rate on a draw, but the credit agencies report your available credit, not your amount owed. Next, unless you have some cash to burn or an extremely savvy investor, getting into the market for investment purposes may not be the best idea. It really depends on where your looking, some areas are holding steady so if your looking for a second home, maybe, but this has not worked itself through yet. You also have to take into consideration taxes, insurance and maintanence. Last, home equities are drying up in areas, so you may not even have to opportunity to get one. Also, if you decide to do this, DO NOT, UNDER ANY CIRCUMSTANCE, tell the lender the home equity is for investment purposes. The lender I used to work for would deny applications if they found out, good luck
- The real question is WHAT KIND of real estate investing do you plan on doing. If you're going to buy and hold I wouldn't use a home equity line of credit for this. If you're going to buy,rehab or fix up and sell to a retail buyer than you could use the line of credit for the repairs or as a down payment to get into the deal. Or you could buy a house "subject-to" and use you line of credit to make the payments until you get it sold. You also want to remember...in today's market it's not a good idea to "sink" your cash into the deal. Always try to limit your risk, using equity from your home is not low risk. borrowing the money to buy the house and use as little of your own money to either get it sold or occupied is lower risk.
