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


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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