If you don’t know what a HELOC is, don’t feel stupid. In today’s world of language everything has an acronym dreamed up by some marketing or English major who feels the need to make everything shorter – and harder. A HELOC is a financial opportunity you have heard of many times – Home Equity Line Of Credit. See? We told you that you are smarter than you realize. Now we can move on to how you can use a HELOC to not only buy real estate but make a significant profit from it.
The basic idea behind the HELOC is that you use the equity value of your home to purchase real estate. That equity number is the difference between the current value of the home and the amount you currently owe on it. The larger the number, the greater the number of opportunities available to you.
What many homeowners do not realize is that they can actually access that equity and use it to invest with without requiring a single dollar of their cash on hand reserves. This concept of no money down has made many people skeptical of using the HELOC as it appears to be some type of get rich quick scheme dreamed up by marketers and shady financial people. The reality is it has been used many times and profited the same people many times over.
You will basically be taking out a second mortgage on your existing home to get the HELOC process started. There are two advantages to this action. First, you will have a significant amount of cash immediately available to you. Second, you are very likely to get a very low interest rate – often as low as 5 percent – to borrow the money. There are a number of TV ads and companies who urge you to do everything else with your HELOC money but invest it. Buying real estate is a way to make money on borrowed money with very little downside.
What if you are already a real estate investor who owns property? How can a HELOC benefit you since you’re already in the business? The simple answer is that instead of having to sell an appreciating property you can simply borrow the money without sacrificing any of its current value – and avoid having to sell the existing property with all the required hassles of paperwork and other legal processes. Actually, it echoes the basic intent of the HELOC by giving you the opportunity to make money on your money.
We have seen two ways where the HELOC can be used to your advantage, which is far better than just letting the equity in your home sit around while you struggle to make ends meet or pass up on any number of investment opportunities. As they say, you can’t take it with you so it makes perfect sense to make the most of it while you have it. Whether you are 25 or 55, you can take full advantage of the HELOC and reap the rewards for many years to come.
Earlier we mentioned that the HELOC is not a get rich quick money scheme, as those are not really investments but just another way to take on insanely high risk with a small realistic chance of actually seeing any return. In order to be as honest with you as possible, we will tell you there are a couple of potential downsides to using your HELOC power. One is that it is very likely that loan you get will have an adjustable rate, so it is possible that you will be paying a higher interest rate over the years to acquire the cash. Of course, the goal is to make a profit on your HELOC money, so paying off the loan within a few years will minimize the impact, if any, on that HELOC.
Another is that because you are using your home as collateral to acquire the HELOC you put your property at risk. The downside of this varies depending on your age and overall financial situation. For example, if you are 25 years old a home is a long term proposition that stretches out over potentially 30 or 40 years, so your risk is higher. If you are 55 and own a home that was bought to raised 4 children, all who are grown and gone, you still need a place to live but your downside is considerably less.
Taking out any HELOC for any reason will require you to do more than be a passive investor who wants to sit around and watch the money roll in. You can get to that point later down the road with the help of a HELOC, and should be your actual goal. Keep abreast of the financial markets and general economy and have a plan on what to do if the investment doesn’t look as promising as it did at the beginning. When possible, pay down your HELOC at an accelerated rate to maximize your profit and minimize your exposure to negative economic events, such as an increase in the bank interest rate. Used wisely and responsibly, a HELOC can be the key to opening the door to future prosperity.