Using Lines of Credit for Your Next Deal
Book: Real Estate Deal Maker: Winning Strategies to Find and Finance Successful Rental Properties in Any Market Author: Henry Washington
One of the coolest things about real estate investing is that you don’t always have to spend your own money. Henry Washington has a favorite strategy for finding the funds for his deals: lines of credit.
Most people think of traditional mortgages when they want to buy a house. But those take time and a lot of paperwork. A line of credit (LOC) is way more flexible. It’s like having a big bucket of money you can dip into whenever you need it.
What Is a Line of Credit?
Think of a line of credit like a credit card, but usually with much better rates. You get a maximum loan amount from a bank, but you don’t have to take it all at once. You only pay interest on the money you actually use.
Henry’s first rental property had a lot of equity in it. A bank called him up and offered him a home equity line of credit (HELOC) against that house. This opened up all sorts of doors for him. He was able to use the money from that one house to buy more deals.
The Perks of Using Credit
There are a lot of benefits to this strategy. First, it’s super flexible. You draw what you need, pay it back, and then use it again later. Plus, you only pay interest on what you’ve withdrawn.
It’s also great for quick deals. If a house pops up that you need to buy fast, an LOC gives you immediate access to cash. You don’t have to wait weeks for a mortgage to be approved.
Secured vs. Unsecured
There are two main types of LOCs. A secured line of credit needs some collateral, like a house or a car. The most popular one is the HELOC, which is secured by your home’s equity.
An unsecured line of credit doesn’t need any collateral. Instead, the bank gives you money based on your credit score and income. These are usually smaller, maybe five to twenty-five thousand dollars. But money is money. If you can get it, use it to your advantage.
How to Use It for Deals
Henry’s favorite way to use an LOC is for gap funding. Imagine you’re buying a property for $200,000 and the bank is only lending you 85 percent. You still need $30,000 for the down payment.
Instead of spending your own hard-earned savings, you could use a line of credit to cover that $30,000 gap. This lets you grow your portfolio without wiping out your bank account.
A Word of Warning
Be careful. Just because you have access to credit doesn’t mean you should spend it all. If you’re not good with credit cards, you might want to rethink this one.
The last thing you want to do is take out a line of credit on your home and then waste it on things that won’t make you money. You have to be sure you’re buying a good deal so you can pay back the line of credit as fast as possible.
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