Morris Invest: How to Use a HELOC to Purchase Rental Properties

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Using a HELOC to purchase your next investment property-- that's today's show. Let's get to it. Hey, everyone. I'm Clayton Morris, long-time real estate investor. And welcome, freedom fighters, to the Investing in Real Estate show. Thank you so much for finding the show. If you're new to the channel or if you're a long-time listener, you know the drill. This is the show where we focus on helping you build passive income, cash flow. And we do it in all sorts of markets across the country, from Michigan down to Ohio to Indiana to Pennsylvania to New Jersey. It doesn't matter where your investment properties are as long as you're buying performing assets, assets that are cash flowing every month. That's how you build true financial freedom. So one of the ways that I've purchased real estate over the years-- in fact, I think it's my number one way that I've bought properties over the years-- is using a HELOC. It's a home equity line of credit. It's a line of credit that lets you purchase properties based on the equity in your own primary residence. Now, there is a difference between a HELOC and a home equity loan. So let's talk about the differences here. And again, I come back to this idea that I love buying and using a HELOC because it's a repetitive line of credit. And that's what a line of credit is. You go to the bank, they look at the value of the home you live in, and they give you a line. A loan is a separate thing. They're basically giving you a check. They're basically giving you a check. And if they say that the value of that home is worth $80,000, they give you a check for $80,000, and the clock starts on that interest. So now, you're paying on that interest like immediately. And guess what? It's not rinse and repeatable, meaning, they're just going to cut you a check as a loan, and you don't get to go back to the till over and over and over and over again. Now, that's the difference between a loan and a home equity line of credit. The line, you start with a zero balance. You start with a zero balance like a credit card. And you can fill it up, pay it back down, fill it up again, and it lasts for about 10 years. Most banks will give you a line of credit that lasts about 10 years. You can then go back to them after 10 years, renegotiate it, get a new line. Or even during the life of that line of credit, you can go back to them and renegotiate. So what is it based on? Well, you know what I like to say about the home you live in. The home you live in is a liability. It's not a performing asset, despite what people think. It is not a performing asset. The poor and the middle class think that owning a home that you live in is a performing asset. It's not. It is a liability. The other night, we were having dinner. And my five-year-old and my seven-year-old, we were playing a game. I know you might think, well, this is a boring game. But instead of playing the superhero game that my kids want to play all the time where we come up with different superhero stories, I said, we're going to play, is it a performing asset or is it a liability? And I would throw out random objects, random things that could either be a performing asset or liability-- for instance, a boat. Is that a performing asset or is that a liability? My kids would say, that's a liability. And I'd say, why is that a liability? And they'd have to answer and really think through. A liability takes money from you and does not put money in your pocket. A performing asset, monthly, puts cash flow in your pocket. Wealthy people look at their net worth. Their net worth is based on performing assets. So when I threw them out the question, what about this house that we live in? We live in a large house. Is this a performing asset or is this a liability? And the answer-- took them a little while-- was, it's a liability. And I said, great. Why is the house we live in a liability? And they thought about it and they realized that it costs us a lot of money to live in this house, that every month, we're paying a mortgage. We're paying electric bills. We're paying heating bills. We're paying for fixes and repairs. It is a liability, and therefore it's not performing for us. No one is paying us to live in this house. But there is a way-- and it's the HELOC strategy-- there is a way to kind of transform and take that liability, if you have a home that you live in, and start to turn it into a vehicle to help you buy performing assets. I'm not saying turn it into a performing asset. I don't want you to rent out a room in your house. That's not what I'm asking you to do. I'm saying, if you think about using this house as a way to help you start acquiring performing assets, then we can be on the same path. So for round numbers, let's just say the house, we bought it for $500,000. And we only owe $200,000 remaining on that house. Well now, I go to a local bank. I say to them, look, I'd like to get a home equity line of credit on my house. Great. They'll assess the property, and they'll see that you have $300,000 of equity. And they're going to give you about 80% of that 300,000-- 80% loan to value. So they may give you 75%. It depends on the bank. So they're going to give you 80%. Now, let's just say, again, for round numbers, you have $200,000 to work with. Again, my math is off, but you follow me. I just want to say for the home equity line of credit, the amount that the bank is giving you is $200,000. They're saying, the equity in your home, we're going to place a second mortgage on your home, and here you go. Here's a line of credit. Now, you start with a zero balance with your line of credit. And you don't pay anything until you actually start running up that bill. That's different, again, than the loan because the loan, you're getting a check. You're just getting a check for $200,000, and that interest rate starts immediately. And now, you don't get to rinse and repeat. You don't get to go back to the drawing board and make that money over again. You've got to pay it off and you're done. So with a line of credit, you start with a zero balance. And remember-- the reason I love this is because it's simple interest. It's different than amortized loans as your primary mortgage. So your amortized loan, you're paying that interest upfront. If you've ever gotten those coupons that you used to get when you bought your first property-- I remember the very first property I ever purchased. They gave me a binder. And it had a whole thing of coupons that I could rip out and send into the bank. And for the first seven years, they showed that amortization schedule. I was paying all interest for that first seven or eight years of the loan. That's different than a home equity line of credit because you're starting and you're paying it like a credit card every month. And it doesn't accrue in the same way that amortized interest does in an amortized loan. So you're using two different financial vehicles, two different financial products, in order to make yourself wealthy and increase your net worth. Now, you may say to yourself, why would you want to use this strategy rather than cash? Well, look. Using the equity in your home, you're leveraging. The bank is giving you money to use, right? Otherwise, this house is a liability. So if the bank is going to give you money to use in order to purchase real estate, I would much rather use that. Yes, you can pay it back, and you want to make sure that your tenants are paying back the loan. So this is the beauty of this strategy. And again, I have acquired more rental properties using the HELOC than I have any other form of wealth building, any other financial product-- private money, cash on hand. I've used my own HELOC in my own house to purchase properties more than anything else. Now, you want to make sure, though, that your leverage point is covered by your cash flow. So what do I mean? Well, I would not recommend taking your HELOC and going out and doing a flip. Finding a house in your backyard and spending nine months rehabbing a house in order that you cross your fingers and hope that you can flip it to somebody, you know, a young family that wants to move into it eight months after you've renovated it-- that I would not recommend. I'm not a fan of the flipping strategy. I'm a fan of buy and hold. I want to hold forever, right? So when you buy, I want your tenant and the cash flow to make sure that you're more than covering the amount you're paying back on your HELOC. So again, if you get a HELOC for 3.99% interest-- or, again, round numbers, nearly 4% interest-- but your cash flowing, like all the properties I buy, are between like 9% and 12% cash flow-- so that's a nice spread. That's a nice spread where I've got enough wiggle room that I can cover my taxes, expenses, and property management fees. And I still have cash coming in every month, enough that my tenant is paying this loan for me. Does that make sense? My tenant is paying my HELOC back, not me. The tenant, the cash flow from that property, is what's covering my expenses on this property. That's the beauty of this strategy. And then every month, I'm increasing my equity again into this property. And then I can go back to the local bank and I can say, look, I now have these additional assets. I've increased the equity even in my own home, because you're still paying your main mortgage, don't forget. You're increasing the equity in your own home, but you're still paying the primary mortgage. Now, I can increase that home equity loan. So we just did that on our home, in fact. We had a lot of equity to work with. And we just kind of got lazy about it. And I said to my wife recently, I said, hey, let's call up our bank and let's reposition our home equity line of credit, because we had a couple of hundred thousand to work with. Let's amp that puppy up. Let's max it out, and let's go on a buying spree. So my wife and I right now are using our home equity line of credit. We're buying properties in Ohio. We're buying properties in our Michigan market. We're just buying, and we're using the bank to do it. I mean, it's a no-brainer, so using the bank to add to my net worth. Now, how does this happen at closing? So you may be saying to yourself, OK, I have a home equity line of credit, and I found an investment property that I want to buy. I'm going to buy this house for $50,000, or I'm going to buy this property for $60,000. It's going to cash flow $800 a month. How do I close on it? Well, it's just the same as if you were paying cash for it. You literally have a home equity line with a check. You would transfer that money, wire that money to the title company on closing day. And because there is no mortgage involved-- meaning you're not taking out a mortgage on the investment property-- you are writing a check from a mortgage you already have in place. You already have the home equity line of credit in place, so you're just writing a check. You're transferring the money from your bank to the title company at closing. And guess what? Now you own this investment property free and clear. Now yes, your home equity line of credit has gone up to $50,000 now. It's increased up to $50,000 or whatever purchase price on the property, $60,000. Now the rent starts paying it back over and over and over again. Before you know it, that house is paid off in three years. So the bank enabled you to build wealth on the backs of their own money-- yes, based on the equity in your home. But it's a killer strategy. And that's why I love it. And so really, you get to have that credit card. You get to have that checkbook from your home equity line of credit. Rinse and repeat, and keep buying rental properties with that money. In another video series, we're going to talk about the way in which the tax code has changed now because of the 2018 tax law. We're going to talk about the differences there because there are some significant changes. So we'll dive into some of the nitty gritty on the taxes around this type of mortgage because it has changed. It has shifted. In fact, Natalie and I wrote a book on how to pay off your primary mortgage using a HELOC. And most of the mechanics are still true. But we need to certainly update and revise the addition to talk about the changes in the tax code. So that will be another episode we will bring to you really soon here on the channel. In the meantime, if you are ready to pick up your first rental property or your 10th rental property, that's what we do all day long in my company. So you can come over to our website. Just go to morrisinvest.com. Click on the Schedule a Consultation button, and you pick the time that works for you. We'll jump on the phone for 30 minutes with our team. We'll find out how many rental properties you currently have. How many are you looking to acquire? What has your overall strategy been over the past few years? And we'll help you get towards financial freedom. That's what we do all day long. And our properties are turnkey. So it's pretty easy. It's very, very easy to work with. So please dial us up. I cannot wait to talk with you, and our team is standing by. But in the meantime, I want you to go out there. Take action. Become a real estate investor. Use all of the strategies that we talk about here on the show. But you know, like I said, the HELOC strategy is one of my all-time favorites. We'll see you next time everyone.
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Channel: Morris Invest
Views: 160,199
Rating: 4.8423409 out of 5
Keywords: how to use a heloc to purchase rental properties, morris invest, clayton morris, turnkey real estate, turn key real estate, investing, passive income, rental property investing, clayton morris real estate, clayton morris podcast, real estate investing 101, HELOC, rental properties, performing assets, using a heloc, home equity, buy and hold, turnkey rental properties, grow portfolio, heloc to payoff mortgage, velocity banking, financial independence
Id: 08V99hU_YPE
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Length: 13min 18sec (798 seconds)
Published: Wed Apr 11 2018
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