Disclaimer: I totally recommend this method if you are in a good financial state and all of your debts are paid off. Please keep in mind, buying another property can come with extra costs you may not be prepared for, so use wisdom before investing in multiple properties.
I felt that this was a good topic to talk about since interest rates are a hot topic right now. Many of you may not know, but my husband and I bought a rental property several years back when we paid off our home. We were motivated in getting a property when we read, Rich Dad, Poor Dad, by Robert Kiyosaki.
Our budget was quite low when we were looking for a property. We knew we had to get a fixer upper. We made an offer on 2 properties, but decided to go with the lower priced home due to the nice layout.
Because it was an investment property, we had to put 15% down. The funds for the down payment and closing cost came from our first line of credit. We then updated the space with our own money. We spent about 7k updating our 2 bedroom/ 2 bath townhouse. We hired a handyman to fix the water damage, lay new flooring upstairs, and paint the kitchen cabinets. We finished the rest of the home to save on cost. It was a lot of work. My husband and I worked shifts after work. Some days I would go and paint, clean, replace electrical outlets, and other days he would do plumbing work, paint, and wood work. But all in all it was worth it.
Since we liked how a HELOC worked for our primary home, we decided to do the same for our investment home. At the time, our mortgage was 6.25%. When we were in the process of refinancing into a HELOC, we found out our property was appraised 10k higher after 6 months of ownership and our interest rate would be about 6.00%.
We did have to pay for the appraisal, but it was only about $300. That was our only out of pocket cost as opposed to a traditional refinance that would be thousands of dollars. So after having the HELOC for almost 3 years, I’ll share my reasons why I am glad we did this and won’t be looking back.
The Variable Interest Rates
Over the years, I have seen the interest rates go from 6.00 to 4.99%. Because we had a very low interest rate for some time, we were able to see a great decrease of our loan balance. Now, at the time of this post, our interest rate is at 7.99%. You may be thinking, geez, that’s high, but it only affected our monthly payments by an increase of $60. Because our balance is going down quickly, the interest rates are not affecting us so much. We look forward to the rates going down again. But if it doesn’t, it’s ok because we are knocking out that principal balance every month. Most of the rental income that we receive goes into the loan, and we leave some aside for repairs, taxes and insurance.
Helps cover major repairs
Every month as the balance gets lower it increases the amount of money accessible for use. So that means if an air conditioning unit needs to be replaced, I don’t have to take money from my pocket. I just use the funds from the HELOC. Keep in mind, I would only use this for a MAJOR expense. All other expenses like small repairs or updates should be budgeted in the rental income.
You can tap into equity, tax free
Did you know that if your rental increases in value, you can ask the bank to increase the line of credit? That means you’ll have access to even more equity. The bank would have to close the previous line of credit and open a new one, but it would take less than a month as long as nothing significant has changed with your credit history and employment. Many investors use the equity to invest in another rental property for the down payment and the money is not taxed because it’s coming from a loan. Another benefit is taking equity before selling a rental property. The wealthy do it all the time. Let’s say you have a rental and the balance on a traditional mortgage is 90k. You sell it for 130k. You would have to pay taxes on the 40k profit. Now let’s say you have a line of credit of 120k total but the balance is 90k. You can take out 30k to do what you’d like, sell the home for 130K and only be taxed on the 10K. This is not secret, many do this when they sell a rental property on a HELOC.
I hope this information helps you whether you plan to get a rental property or your own. Until next time…
Very smart move! Just want to know? How to look for a HELOC? When I have in the past approached any bank, and credit union about this idea they just seem to scratch their heads. Could you email me how to research HELOCS? Along with where you got your strategies? Sincerely, A. Blakely
Hi A. Blakely
I wrote all about HELOCS here:
My go to banks have been TD Bank and BBT (now Truist) and they didn’t bat an eye when I told them of this concept. But the rep needs to be knowledgeable.
I hope that helps