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A common tool or a common financial vehicle that a lot of people use when investing in real estate is what's called a home equity line of credit or a HELOC. ⚒️🚗💲🏘️
When you go in and you take out a loan or you take out a mortgage, that's called the line of credit on the property that you already have equity in.
Normally that is on your own personal residence. 🏘️
So let's say you have this property, that's worth 500,000 and you apply and you can get a line of credit for up to let's say, 80%. That means you have no access to $400,000. 🏘️💲
What people will do is they will take an advance on that line of credit. Meaning they will actually take money out.
Let's say it’s $100,000. They can then use that as a down payment towards the purchase of another property.
This is how a lot of people scale when they purchase real estate investing through this home equity line of credit. The good news about a home equity line of credit is usually it is at the rate in which you can get mortgages at the current prevailing mortgage rate. Usually, it's variable, but that's okay. 👨💼⚖️💲
It is a lot cheaper than if you were to go into a bank and just ask for a loan to buy a car.
For example, let's say loans for cars or the standard consumer loans are six, seven, 8% mortgages are usually in that range of two, three, 4%. So it's almost half of what you would get if you were going to try to get a consumer loan. That is a big advantage. 💰📈
The disadvantage of using a home equity line of credit, when you go to buy a property in an investment property, is that you have to service that debt, meaning you're going to have monthly payments on that debt.
For example, in this case of $100,000, your monthly payments may be let's say $400 or $500 or $600 a month to pay for that mortgage. That second mortgage payment is on top of the first mortgage that you are going to get when you buy that rental property. 💰🏘️
So the additional expense on the rental property is you have the down payment that you took out from the line of credit.
Let's say that is $300 a month. Plus you are going to have your mortgage payments for the actual loan … the one you took out for the property itself. That could be another $1,000. You then add in all the other expenses. 💰⏳🏘️
Because you borrowed the money for the down payment, and when I say borrow, you actually used funds from your line of credit. You end up having a situation where your expenses exceed the rents, which means you are now operating at negative cash flow.💰💳📊
This is what happens a lot of times and people don't understand that. And they say, well, I'm just going to take a loss while I let the property appreciate assuming that the property appreciates. That's the wrong thing to do. ⏳💰🤔🏘️
When you purchase a property for investments, you want to make sure that it cash flows right from the start, even with all the finance in place, even with all the expenses in place.