Text: "ARV & Comps: How to profit on your real estate investments"

What Does ARV Mean in Real Estate Investing?

/in ,

To profit in real estate investing, you’ll need to know: What does ARV mean?

Real Estate Investing: What Does ARV Mean?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market.

What Are Comps?

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. Similarly, compare a 2-bedroom, 1-bath house to houses of the same specifications – not to 4-bedroom, 2-bath homes.

How To Get an Accurate ARV

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

What Does ARV Mean for Profit in Real Estate Investing?

Estimated profit is what you expect to make on the transaction between:

  • buying the property
  • fixing it up
  • selling it again.

Additionally, equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by:

  • buying properties with a low purchase price and a high ARV
  • successfully refinancing after a flip
  • paying down the mortgage with rent income.

If you want to find the true profitability of a deal, then use your ARV and comparables:

ARV – (Purchase Price + Budget) = Profit Amount

Read the full article here.

Watch the video here:

https://youtu.be/4RErCDhSi44

Text: "BRRRR Loan Requirements"

How Will Changing BRRRR Loan Requirements Affect You?

/in ,

Lenders are upping the requirements for a BRRRR loan. Here’s what to know to prepare.

BRRRR has two loans – hard money to buy, long-term to refinance. With inflation, both loans will have lower LTVs.

What else should you expect?

Hard Money BRRRR Loan Requirements

Many private money companies – particularly bigger, national lenders – are requiring 20% down.

Hard Money Mike is a little different. We fund using real private money, so our loans aren’t as dictated by federal rates. We still go up to 100% on financing, as long as you’re approved for your long-term loan up-front.

Smaller lenders can give you a better advantage with BRRRR during inflation. But you should still expect many private lenders to offer lower LTVs.

Bank BRRRR Loans with Inflation

Long-term loans are decreasing, making it harder to cash out. Traditional lenders could go down to 70% or 65% LTVs, or just have tougher requirements.

Money is shrinking, so the pot of money available to you on either BRRRR loan is shrinking.

The Plus Side of BRRRR and Inflation

What’s the good in all of this? If you’re in a bad financial position, you’ll have a hard time continuing your real estate career in inflationary times.

But, if you’re in a good position, you’ll be able to find fantastic properties in your pricepoint. And you’ll be able to find them for 20-40% less money than you could a year ago.

Don’t fight what’s happening with the economy – figure out how to use it.

Understand BRRRR loan requirements now. If you get into a BRRRR, fix it fast and refinance fast. Figure out your BRRRR’s long-term loan first before you look for a short-term loan.

Things are changing rapidly in the real estate investment world. Get yourself in the best position to be able to work with it.

Read the full article here.

Watch the video here:

Text: "Benefits of a HELOC"

Benefits of a HELOC: Are You Missing Out?

/in ,

If you don’t use a HELOC in your real estate investment career, you’re missing out on these benefits.

The uses and benefits of a HELOC for a real estate investor are broad and huge. This line of credit is one of the best ways to tap into your existing money to create more money.

Let’s take a look at a few of the ways you can utilize your HELOC to benefit your real estate investments.

Benefits of a HELOC for Real Estate Investors

Down Payment

You can use a HELOC as a down payment on any loan – hard money or long-term. Anytime a lender requires a down payment, you can take the money off your home equity line of credit, and bring it to closing.

For down payments on rental properties, your lender will still require the money borrowed from your HELOC to be included in your debt ratio.

Construction Costs

For a flip or a BRRRR, you can use money from your HELOC to cover the costs of construction.

Money from a hard money lender or bank comes at a higher price. If you’d prefer to use your HELOC to cover construction costs, you can lower the amount borrowed from a lender.

A HELOC will be some of the cheapest money you can find out there – especially now with money tightening. Using it helps lower your overall costs.

Another benefit of a HELOC is the speed and flexibility. If you don’t have time to wait for your lender’s escrow process to pay your contractor, you can just pull the payment off your HELOC.

Carry Cost Benefits of a HELOC

Carry costs include monthly interest, HOA fees, mortgage payments, some materials and construction, and any other regular cost associated with owning the property.

These costs can turn into a burdensome expense on a flip. You can pull from your line of credit to cover carry costs, and when your flip sells, you can put it all back in.

Buying Properties at Auction

There will be more foreclosures coming up soon. To take advantage of this turn in the market, you can use money from your HELOC to buy a foreclosed property at auction.

The benefit of a HELOC here is that you don’t have to get lender approval or meet lender requirements before placing a bid on a property. You can pull from it, pay for the property (or at least the down payment), and refinance later if needed.

Buying Wholesale Properties

You can also buy properties from wholesalers or the regular marketplace when you otherwise couldn’t. You close with a HELOC, then go back and refinance with a hard money or bank loan.

With this strategy, you can close on a deal faster than anyone else. You don’t have to sift through the paperwork and red tape of a loan; just go to the bank and wire out the funds.

Bridge Loan Benefits of a HELOC

Some investors use their HELOC to bridge between properties.

They have one flip for sale, but they’re ready to buy their next one. They use a HELOC to cover the down payment, then pay it back when the other property sells.

You can create your own bridge loan by using a HELOC.

Lend to Other People

You can also use it to lend to other people in the real estate investment community at a profit.

You can borrow from a HELOC at a rate of 5-6%, and you could charge someone else up to 10-12%. (But of course, always be careful and protect yourself when lending to other people).

Overview of the Benefits of a HELOC

  • Using your HELOC allows you to use your money, without taking anything from your savings or 401k
  • You can tap into the equity that’s already at your disposal
  • It keeps projects going while typical loans are tightening up
  • You can get into properties quickly and refinance a few weeks later
  • You can avoid the higher rates of external lenders by borrowing from your HELOC

Read the full article here.

Watch the video here:

https://youtu.be/MoUp2CAht0A

Text: "Leverage Up!"

The Power of Leverage: Are You Losing Money?

/in , ,

These simple examples show you the power of leverage in real estate investing.

Real estate investors know they need loans to buy properties. But few real estate beginners understand exactly how big of a difference leverage makes.

Leverage turns property-buying into a real estate investment career. It builds real money, and a portfolio of net worth that can create generational wealth.

In this article, we’ll use simple examples to break down the power of leverage in real estate – and how maximizing leverage skyrockets your real estate career.

What Is Leverage?

In short, leverage means buying with money that isn’t yours in order to make a profit.

Leverage takes the form of loans from lenders: banks, credit unions, hard money lenders, people you know.

The greatest tool for a real estate investor is leverage.

How to Find the Power of Leverage

Let’s look at some simple numbers to show the power of leverage.

We’ll look for two things:

1) How much income can you get from a rental?

2) How much equity will a property generate over time?

Note: We’re going to use $100,000 as our base number. That might be a lot more money than you have to start with. It’s also likely a lot less money than you’ll spend for your properties.

Regardless, it’s a simple number to show the power of leverage. These same principles will apply despite your starting number or your property costs.

Now, let’s dive in.

Income without Leverage vs with Leverage

Rent is the income you get from tenants. Net rent is that income after you’ve made any loan payments for the month on that property.

Net rent is the number that’s true cash flow for you. We’ll use this number to analyze real estate income with and without the power of leverage.

Income No Leverage

Say you have $100,000 to invest in real estate.

You could take this money and buy one rental property valued at $100,000. You can invest the full $100,000 and receive $1,200 of net rent income per month, or $14,400 per year.

Income With Leverage

Now let’s see how it plays out when you involve a lender rather than buying outright.

You could talk to a lender who might offer to loan you $75,000 if you put in the other $25,000. Now, instead of pouring all of your money into one rental property, you’ll only have to use $25,000. The $75,000 covered by the lender is considered leverage.

Using lenders like this, you could buy four properties, each with a $25,000 down payment. Because you’re paying a mortgage, however, your net rent per month goes down. Your net rent is now $750 per property. This brings in $3,000 per month, or $36,000 per year.

With leverage, you have the potential to make $1,800 per month more, or an additional $21,600 per year – just from using leverage.

Net Worth without Leverage vs with Leverage

Rent income isn’t the only financial outcome of buying and renting real estate. There’s also appreciation. 

According to the stats over the last 20 years, real estate goes up an average of 5.3% per year. Using this 5.3% number, one home increases value by an average of $5,000 per year. 

This isn’t a straight line (ie, exactly $5,000 per year). Some years may appreciate more, some less. But over the long-term, that’s the average yearly appreciation, so we’ll use this number.

Net Worth No Leverage

Let’s see how appreciation would impact our real estate portfolio had we bought the one home outright, with no leverage.

Our single rental would have $5,000 in equity after one year, $25,000 after five years, and $150,000 after 30 years.

Net Worth with Leverage

Now let’s see the equity of the four properties purchased with leverage. 

Each of the four homes increases in value by $5,000 every year. Multiply that by four, and your portfolio appreciates $20,000 per year.

Over a 30-year span, your four properties would add $650,000 to your net worth (compared to $150,000 with the single property).

Total Power of Leverage

Let’s put all these numbers together now.

Using leverage brought in an extra $21,600 of income per year,  plus a total net worth increase of $600,000 over 30 years.

This is the power of leverage: bringing in extra income and raising your net worth through equity.

By using other people’s money, you can take advantage of the true wealth in real estate.

Maximizing Leverage

Now, we’ll take this example one step further. Simply using leverage unlocks a lot of money. What happens when you maximize leverage?

We looked at an example of a lender giving you 75% ($75,000 on a $100,000 property). “Maximizing” that leverage would look like getting a bigger loan. Instead of 75%, another lender might give you 80-85%.

80% Leverage

Let’s go back to the original example, but say a bank gives you 5% more. Now, you get $80,000 per $100,000 transaction.

Income with Maximized Leverage

Your down payment per property is now only $20,000, so you can buy 5 properties. But since you borrowed more money, the mortgage payment is higher, and the net rent goes down.

At this point, it may seem like you’re set up to make less money since you’re paying more on your loan. But let’s see how it plays out.

Five properties with an income of $700 per month is $3,500 per month. This works out to be $42,000 per year. Annually, that’s $6,000 more than using a 75% loan, and $27,600 more than using no leverage at all.

Equity with Maximized Leverage

For five properties, after 30 years, equity appreciates by $750,000. All that money is added to your net worth.

Maximizing your leverage in this scenario would give you $42,000 in yearly income, plus $750,000 added to the value of your properties over time.

That’s the road to generational wealth.

How to Maximize Leverage

To maximize your leverage, focus on becoming the sort of investor that attracts lenders.

Have a great credit score. Make sure your income is in line. Know the numbers lenders will ask about. Be professional about your investment career.

Having all the right pieces in place will help your leverage take you further. The more leverage you use, the better returns you’ll see – both in the short-term income and long-term equity.

Harnessing the Power of Leverage

Now you can see how leverage impacts your real estate career. 

What are your next steps?

If you need an entry point into real estate investment, email Mike@HardMoneyMike.com. Ask about our 30-day fuel up challenge to learn how to maximize your leverage.

You can also join our weekly Leverage Up chat, on Thursdays from 1:15pm – 2:15pm MST at this link.

Text: "BRRRR Lending Options During Inflation"

New BRRRR Lending Options to Consider in a Down Market

/in ,

With inflation, typical rental property loans may not do the trick. Here are some new BRRRR lending options for you.

With rates so good over the last three to four years, all BRRRR investors were looking at one loan product – the 30-year fixed mortgage.

With rates increasing, however, you might need to look beyond the 30-year fixed loan to get into good BRRRR properties. Here are some options that can bridge your properties until rates go down.

ARMs (Adjustable-Rate Mortgages) for BRRRR

You can get three-, five-, or seven-year ARMs. Whichever time length you pick, the rates will be fixed during that period. Afterward, the rates become adjustable.

In rising markets, these loans aren’t that great. In declining markets, though, they can be the perfect loan to bridge you into a rental property.

You can get an ARM for .5-2% lower than a 30-year fixed mortgage. These lower rates can cash flow a property until either prices go up and you can sell, or rates go down and you can refinance.

Interest-Only Lending Options

With the interest-only BRRRR lending option, you don’t pay any principal for the first ten years.

An interest-only loan is appealing right now because it keeps cash flowing. Your loan amount doesn’t go down, so it’s not a great option for the long-term. But it is a good lending option to get you into a property during this next market.

40-Year AM (Adjustable Mortgage)

A 40-year AM spreads the loan payments over 40 years instead of the 30 with a traditional fixed mortgage. This adjustable mortgage gives you lower monthly payments… and more cash flow.

What To Keep In Mind with These New BRRRR Lending Options

ARMs give lower rates, 40-year AMs offer lower payments, and interest-only loans postpone the principle.

Keep in mind: these loans won’t help your equity or get a property paid down quickly. But they are good options to get into properties while values are low and funding is tight.

Remember that conditions of BRRRR are ever-changing. Get plugged into the money side of investing, and talk to lenders to see what’s available for you in inflationary times.

Read the full article here.

Watch the video here:

Text: "Gap funding for a fix-and-flip"

How to Use Gap Funding for Your Flips

/in ,

Don’t walk into a loan without a plan – use gap funding for flips!

During a time when lenders are offering less money up-front for investment deals, you might need more money to fill in the gaps on your fix-and-flip projects.

Here are a few phases where you might need gap funding on your project.

Down Payments

Hard money lenders require at least 10% as a down payment. This is a very common use for gap funding.

If you use gap funding for your down payment, you’ll need to find out right away whether or not your hard money lender will accept a secured gap loan on the property.

Construction Costs

Another way to use gap funding for flips is for construction costs – rehab, repair, or anything necessary to bring the house up to the ARV and onto the market. These expenses can rack up fast, and they may not be completely covered by the main loan for the flip.

Carry Costs

Some investors will only use gap funding for the carry costs during their flip.

The lender will pay the mortgage payment, the insurance, or whatever other monthly costs are required during the project. Having a gap lender for carry costs can smooth out a fix-and-flip experience.

The Reach of Gap Funding for Flips

It’s possible to coordinate with your gap lenders to cover all three of these additional costs. This is a common way investors successfully finish fix-and-flips with zero money down.

You can use gap funding however you need, as long as both the hard money lender and the gap lender agree that the loan fits their criteria.

Not all hard money lenders allow you to secure your gap loan with a lien on the property you’re closing on. And not all gap lenders will loan to you unsecured.

Read the full article here.

Watch the video here:

Text: "Grow your Airbnb with OPM!"

Grow Your Airbnb Faster with OPM

/in ,

Getting loans for short-term rentals doesn’t always finance 100%. Grow your Airbnb faster with OPM!

You can get short-term rental loans from banks and hard money lenders. But one of the best strategies for funding Airbnbs is to borrow money from real people.

Using OPM Loans for Airbnb

Other People’s Money comes from family, friends, or anyone else with money they’d like a better return on.

Maybe they’re only getting a 1% rate in their bank account and want more from a real estate investor. Maybe they’re nearing retirement and want to start getting their money out of the stock market. Whatever a person’s situation, there’s a lot of money out there looking for better returns.

You can by a VRBO with someone else’s money, then pay them back with interest at 5-6%. It’s cheaper for you, and double or triple what your lender would make keeping their money in a bank. Win-win.

OPM requires no credit or income qualifications, and it gives you a faster, more convenient money source to grow your Airbnb.

Setting Up a Partnership with OPM

Instead of using OPM as a loan, there’s a way to structure it as a partnership.

In this case, you have no debt requirements. You can return their money with a rate of 5%, but if there’s a bad income month, you’re not obligated to pay.

As far as cash flow, you can’t beat an OPM partnership or loan. It can help you invest in Airbnbs with no money out of pocket, no qualifications, and potentially no debt.

If you need help setting up the OPM process, we’ve done thousands of OPM transactions and can answer any questions you have.

Read the full article here.

Watch the video here:

Text: "Get Money Wise!"

7 Real Estate Loan Fundamentals – Hard Money 101

/in ,

For a successful investment career, start with these 7 real estate loan fundamentals.

Are you “money wise”? It’s not hard to get there. And it will save you a lot of cash down the line.

It’s like when a person who knows about cars goes to a mechanic – they have peace of mind because they understand what’s going on. If you’re not a “car person,” at the mechanic’s it’s harder to figure out if they’re telling you the truth, or just trying to sell you more than you need.

As a real estate investor, leverage is at the center of what you do. It’s like a foreign language when you first start out. But when you become money wise, the leverage in your real estate investment career is fully in your hands.

Here are 7 real estate loan fundamentals that will make you money wise.

Fundamentals of a Real Estate Deal

There’s certain information you’ll need to bring to your lender when you need a loan. If you know the answers to their questions, the time with your lender will be much more productive.

At the end of the day, lenders want to know: Do you have a good deal? (And you should want to know the answer, too!)

We’re going to dive into 7 main concepts to answer that question:

  • Strategy
  • Purchase Price / Contract
  • Scope of Work
  • Budget
  • Estimated Profit  / Equity
  • Comps / ARV
  • Exit Strategy

1. Strategy – What Is a Real Estate Strategy?

When your lender asks about your strategy, they want to know whether you’ll use the property as a

  • fix-and-flip
  • a rental
  • or if you’re not sure yet.

What is a real estate strategy dependent on? 1) your goals, and 2) the property.

You’ll have to know the numbers to know if the property will make a good flip with carry costs you can afford, or if it would cash flow well as a BRRRR-style rental.

But how do you “know the numbers”? Let’s start with the cost of the property.

2. Purchase Price / Contract – What Are the Fundamental Numbers of a Real Estate Loan?

Your lender could refer to this as purchase price, contract, or as-is value.

In real estate investment, there’s a distinction between what you’re paying for a property and what it’s worth. The purchase price isn’t necessarily what the value of the home is. 

This is the number on the contract, the number you’ve agreed to buy the property for. And this number is foundational to whether or not your project will turn a profit.

3. Scope of Work – How Do You Fix Up a Real Estate Investment?

Many beginner investors mistake “scope of work” for the budget. Scope of work is what you’re going to do to the property, not the number of what that work will cost. 

Will you add a bedroom? Re-do the garage? Are you going to convert the porch to additional square footage? Or add egress windows to the basement?

Scope of work is your rehab plan. Lenders need this info to find out what kinds of properties they should compare to yours to estimate an after repair value.

4. Budget – What Is a Real Estate Budget?

During the conversation with your lender, have a high overview of your construction budget. You don’t necessarily need all the details ironed out quite yet.

For example, you can estimate that the kitchen will cost $10,000, siding $6,000, windows $4,000, and new paint $2,000. At this point, you don’t need to share a breakdown of the cost of each new appliance, labor and materials, etc.

You just need a realistic estimate of how much it will cost to get into the property. Having your scope of work lined out helps you with an estimated budget. When you know the purchase price an your budget, then you know how much the entire project will cost.

5. Estimated Profit (Flips) / Estimated Equity (Rentals) – How Much Will a Deal Make?

Estimated profit is what you expect to make on the transaction, between buying the property, fixing it up, and selling it again.

Equity is the difference between the amount you owe and what the property is worth. You build equity on your rentals by successfully refinancing after a flip and paying down the mortgage with rent income.

The number one reason to be in real estate investment is to make money and create wealth – it’s true for lenders, and it’s true for you. So, it’s important to both you and your lender that your properties make profit or build equity.

You’ll need your estimated profit / equity when you bring a deal to your lender.

6. Comps / ARV – What Does ARV Mean in Real Estate Investing?

ARV is the after repair value. It’s what the property will appraise for, or sell for, on the current market once the scope of work is completed.

You estimate a property’s ARV by looking at the prices of similar homes in the current market. 

Comps (comparables) are those similar homes you look at. It’s important that your comps have the same value as your property.

For example, if your deal is for a 950 square-foot home, you’ll compare it to other 900 to 1,000 square-foot homes on the market, not a 2,000 square-foot one. A 2-bedroom, 1-bath house will be compared to houses of the same specifications, and not compared with 4-bedroom, 2-bath homes.

For your ARV to be accurate, you need to stay true to your scope of work. If you only repaint and re-carpet a house that needed much more work, you won’t get top-of-the-market value when you try to sell or refinance.

On the other hand, if your scope of work is a full remodel, your comparables should be homes that are fully remodeled, so you don’t miss out on any profit.

The money you put into fixing up a house isn’t a direct indicator of how much the house will be worth. What the property looks like when it’s finished has nothing to do with how much it cost to get it there.

To find the true profitability of a deal, your ARV and comparables help:

ARV – (Purchase Price + Budget) = Profit Amount

7. Exit Strategy – How Will You Pay Your Real Estate Loans?

When a lender asks for your exit strategy, they want to know your plan for paying off the loan. For hard money loans, your exit should be fast.

If it’s a flip, your exit strategy is to sell the property, then pay off the loan.

If it’s a rental, your exit strategy is to refinance into a long-term loan, which will pay off the hard money loan.

The Why Behind Money Wise – Real Estate Investing Definitions

When you come to the table prepared, with strategies, numbers, and knowledge, you can speak the same language as your lender.

This is key to ensuring you have a safe transaction with a lender that is working in your best interest.

Curious About Other Real Estate Loan Fundamentals?

If you have any questions, or want coaching through a deal, we’re happy to help. Reach out at HardMoneyMike.com.

For more info on real estate loan fundamentals, keep up with our Hard Money 101 series on our blog, or visit our YouTube channel here.

Happy Investing.

Text: How your credit score impacts cash flow"

How Does Your Credit Score Impact Your Cash Flow?

/in ,

Rates and cash flow depend on your credit score. Here’s just how much:

Let’s look at an example with real numbers to get a picture of just how seriously your can credit score impact cash flow on your real estate investments.

Comparing Interest Rates

Pretend you have a $300,000 loan. And you were able to get a 6% interest rate – a normal rate for today. Your monthly payment would be around $1,800.

But, for every 10 to 20 points your credit score lowers, your rate increases. This raises your monthly payments by $100 to $200.

So with a low score, you’d only be able to get a 9% rate on that $300,000 loan. You’d be giving $615 every month straight to the bank. That’s money other investors will be able to use to re-invest.

Chart showing your interest payment depending on your rate for a $300,000 loan

Interest Rates Over the Life of the Loan

This interest story gets worse when we consider the full life of the loan.

The person with a 6.5% interest rate pays a little under $1,200 per year in interest, or around $35,000 for the full 30-year loan.

The person with 9% pays over $7,300 yearly, and over $221,000 over the course of the loan!

Chart showing your yearly and 30-year interest payments depending on your rate for a $300,000 loan

We can take this example out further.

Let’s say we have a portfolio of 10 properties, not just one, each with $300,000 loans.

At 6.5%, you’ll spend almost $350,000 over 30 years between the interest of all the loans. At 9%, you’d pay $73,800 per year on interest alone for your portfolio. As a result, you’d shell out a grand total of $2.2 million in interest in 30 years.

Chart showing your total interest payments over the life of 10 $300,000 loans, depending on your rate.

Cash Flow & Credit Score Conclusion

As you can see, a low credit score is a major disadvantage. Properties that would cash flow for someone else, won’t for you. Your debt-to-income could disqualify you for DSCR loans. Your score itself can disqualify you for many other loans.

Look at the impact of your credit score on cash flow. Keep more money to do what you love and give less to the banks in the form of interest.

Above all other investment goals: raise your credit score.

If you need to work with a credit specialist to get everything in line, it’ll be worth your time. Do it ASAP – now is the time to get prepared as a real estate investor. Because in 2023, prices will come down, and you don’t want to miss those opportunities.

Read the full article here.

Watch the video here:

https://youtu.be/sa9iCDxJFnk

Text: "What is a HELOC?"

What is a HELOC? A Real Estate Investment Must!

/in ,

Here’s what a HELOC is and why you should be using it as a real estate investor.

More and more investors have been calling us to ask about HELOCs.

With traditional, non-traditional, and hard money loans, why would a real estate investor need a HELOC?

In times like this with money tightening, it’s hard to get all the money you need for a project from a lender.

Let’s talk about what a HELOC is, how to get one, and what to do with it to leverage your real estate investments.

What Is a HELOC?

It stands for Home Equity Line of Credit. But what exactly is a HELOC?

It’s a Lien

A HELOC is a lien against a property. 

It can come as a first, second, or sometimes even third mortgage. If you don’t owe anything on your house, you can put a HELOC in first position. With an existing mortgage, it’s put in second position.

It’s a Line of Credit

A HELOC is set up kind of like a credit card. The bank sets a limit they’ll lend and a term for how long.

A HELOC can pay for almost anything related to your projects. You can go to Home Depot and get materials, you can pay your contractors, you can make a down payment. It can take the form of a bank wire, a debit card, or whatever other option your bank gives you.

At the end of the month or the end of a project, you pay the HELOC off, and all the credit is freed up. You can use it again, pay it down, then use it again for as long as the term is active.

Typically, the bank will set a 10-year term. So for 10 years, you can use and re-use it up to the limit they set. If your property goes up in value during that time, it’s possible to get a refinance for a higher limit.

It’s a Faster, Easier, Cheaper Source of Money!

Any expenses you can put on a HELOC frees up your investment experience. When you borrow from other places (hard money lenders, banks, etc), there’s more paperwork and more cost.

HELOCs are easier, faster, and cheaper. A successful investor uses every leverage tool at their disposal, so it’s important to tap into this one.

Benefits of a HELOC

The uses and benefits of a HELOC for a real estate investor are broad and huge. This line of credit is one of the best ways to tap into your existing money to create more money.

Let’s take a look at a few of the ways you can utilize your HELOC to benefit your real estate investments.

Down Payment

You can use a HELOC as a down payment on any loan – hard money or long-term. Anytime a lender requires a down payment, you can take the money off your home equity line of credit, and bring it to closing.

For down payments on rental properties, your lender will still require the money borrowed from your HELOC to be included in your debt ratio.

Construction Costs

For a flip or a BRRRR, you can use money from your HELOC to cover the costs of construction. 

Money from a hard money lender or bank comes at a higher price. If you’d prefer to use your HELOC to cover construction costs, you can lower the amount borrowed from a lender.

A HELOC will be some of the cheapest money you can find out there – especially now with money tightening. Using it helps lower your overall costs.

Another benefit of a HELOC is the speed and flexibility. If you don’t have time to wait for your lender’s escrow process to pay your contractor, you can just pull the payment off your HELOC.

Carry Costs

Carry costs include monthly interest, HOA fees, mortgage payments, some materials and construction, and any other regular cost associated with owning the property.

These costs can turn into a burdensome expense on a flip. You can pull from your line of credit to cover carry costs, and when your flip sells, you can put it all back in.

Buying Properties at Auction

There will be more foreclosures coming up soon. To take advantage of this turn in the market, you can use money from your HELOC to buy a foreclosed property at auction.

The benefit of a HELOC here is that you don’t have to get lender approval or meet lender requirements before placing a bid on a property. You can pull from it, pay for the property (or at least the down payment), and refinance later if needed.

Buying Wholesale Properties

You can also buy properties from wholesalers or the regular marketplace when you otherwise couldn’t. You close with a HELOC, then go back and refinance with a hard money or bank loan.

With this strategy, you can close on a deal faster than anyone else. You don’t have to sift through the paperwork and red tape of a loan; just go to the bank and wire out the funds.

Bridge Loan

Some investors use their HELOC to bridge between properties. 

They have one flip for sale, but they’re ready to buy their next one. They use a HELOC to cover the down payment, then pay it back when the other property sells.

You can create your own bridge loan by using a HELOC.

Lend to Other People

You can also use it to lend to other people in the real estate investment community at a profit.

You can borrow from a HELOC at a rate of 5-6%, and you could charge someone else up to 10-12%. (But of course, always be careful and protect yourself when lending to other people).

Overview of the Benefits of a HELOC

  • Using your HELOC allows you to use your money, without taking anything from your savings or 401k
  • You can tap into the equity that’s already at your disposal
  • It keeps projects going while typical loans are tightening up
  • You can get into properties quickly and refinance a few weeks later
  • You can avoid the higher rates of external lenders by borrowing from your HELOC.

Primary vs Secondary HELOCs

You can get a HELOC from two sources: the house you live in, and, potentially, some of your rental properties.

What is a HELOC on a Primary Home?

HELOCs are calculated using LTVs and CLTVs (combined loan-to-values). 

To calculate this, the bank looks at the loan balance for your first mortgage, plus what the HELOC will add to it. Then they divide that by the value of your home to get to the combined loan-to-value.

Most banks and credit unions will go up to 90% CLTV, but some do 100% on primary homes. 

Using a HELOC unlocks all the equity you’ve established on your home as home values go up over the years.

What is a HELOC on a Rental?

Rental HELOCs are a little more limited. They have different LTV/CLTV requirements. 

For rental properties, there are some banks, credit unions, and mortgage brokers that will allow HELOCs in second position that go up to a CLTV of 65% to 75%. 

Different lenders will limit the amount of secondary HELOCs differently, but most will give you one or two properties.

When To Get a HELOC

Start using your HELOC now, before home prices go down. 

If you have a lot of equity in your rental properties or home, you can tap into that now while the market’s still high. This limit will be locked in for 10 years, even as your home value will likely come down 5-10% in the next six to nine months. 

If you wait to take out your HELOC, you’ll lose more of your available funds.

Where To Find HELOCs

There are three places you can look to find HELOCs.

1. Credit Unions

Credit unions will have the best HELOC rates and terms. We’ve found that to be universal state-to-state.

Shop around at local credit unions. Make sure the lender you’re working with likes real estate investors. Each lender has their own niche. One may prefer doing car loans, but another will prioritize HELOCs.

You’ll find the best deal from a credit union, but you should still shop around for the right one.

2. Local Banks

Local banks usually like to work with real estate investors. They’ll have more products available as far as HELOCs for rental properties and HELOCs on multiple properties.

3. National lenders

Now that the refi-boom is settling down, national lenders and mortgage brokers are starting to offer HELOCs. Going through a national lender will open you up to more products, but the cost is almost guaranteed to be higher.

Consider all three of these options to find the best deal you can. For a HELOC, the “best” deal involves not just rate but LTV.

What Is a HELOC and More

You can use a HELOC to take advantage of what’s happening in the market in 2022.

If you need more guidance with a HELOC of your own, reach out to HardMoneyMike.com.

For one-on-one help, send us an email at mike@hardmoneymike.com. We’re happy to coach you through any real estate investment questions.

Happy Investing.