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Morris Invest: How to Use a HELOC to Purchase Rental Properties - YouTube
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using a HELOC to purchase your next
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investment property that's today's show
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let's get to it
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hey everyone I'm Clayton Morris longtime
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real estate investor and welcome freedom
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fighters to the investing in real estate
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show thank you so much for finding the
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show if you're new to the channel or if
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you're a longtime listener you know the
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drill this is the show where we focus on
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helping you build passive income cash
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flow and we do it on all sorts of
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markets across the country from Michigan
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down to Ohio to Indiana to Pennsylvania
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to New Jersey it doesn't matter where
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your investment properties are as long
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as you're buying performing assets
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assets that are cash flowing every month
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that's how you build true financial
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freedom so one of the ways that I've
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purchased real estate over the years in
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fact I think it's my number one way that
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I've bought properties over the years is
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using a HELOC it's a home equity line of
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credit it's the line of credit that lets
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you purchase properties based on the
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equity in your own primary residence now
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there's a difference between a HELOC and
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a home equity loan so let's talk about
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the differences here and you know again
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I come back to this idea that I love
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buying and using a HELOC because it's a
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repetitive line of credit and that's
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what a line of credit is you go to the
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bank they look at the value of the home
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you live in and they give you a line
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alone is a separate thing they're
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basically giving you a check they're
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basically giving you a check and if they
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say that the value of that home is worth
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$80,000 they give you a check for
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$80,000 and the clock starts on that
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interest so now you're paying on that
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interest like immediately and guess what
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it's not rinse and repeatable meaning
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they're just gonna cut you a check as a
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loan and you don't get to go back to the
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till over and over and over and over
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again now that's the difference between
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a loan and a home equity line of credit
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the line you start with a zero balance
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you start with a zero balance like a
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credit card and you can fill it up right
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pay it back down fill it up again and it
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lasts for about ten years most banks
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will give you a line of credit that
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lasts about ten years you can then go
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back to them after ten years
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renegotiate it get a new line or even
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during
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the life of that line of credit you can
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go back to them and renegotiate so what
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is it based on well you know what I like
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to say about the home you live in right
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the home you live in is a liability
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right it's not a performing asset
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despite what people think it is not a
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performing asset right the poor in the
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middle class think that owning a home
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that you live in is a performing asset
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it's not it is a liability the other
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night we were having dinner and my five
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year old and my seven year old we were
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playing a game I know you might think
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well this is a boring game but well
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instead of playing the superhero game
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that my kids want to play all the time
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where we come up with different
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superhero stories I said we're gonna
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play is it a performing asset or is it a
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liability and I would throw out random
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objects random things that could either
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be a performing asset or liability for
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instance a boat you know is that a
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performing asset or is that a liability
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my kids would say that's a liability and
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I'd say why is that a liability and
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they'd have to answer and really think
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through you know a liability takes money
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from you and does not put money in your
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pocket a performing asset monthly puts
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cash flow in your pocket you know
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wealthy people look at their net worth
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their net worth is based on performing
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assets so when I threw them out the
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question what about this house that we
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live in you know we live in a large
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house is this a performing asset or is
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this a liability and the answer took
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them a little while was it's a liability
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and I said great why is the house we
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live in a liability and they thought
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about it and they realized that it costs
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us a lot of money to live in this house
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that every month were paying a mortgage
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were paying electric bills were paying
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heating bills were paying for fixes and
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repairs it is a liability
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and therefore it's not performing for us
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no one is paying us to live in this
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house but there is a way and it's the
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HELOC strategy there is a way to kind of
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transform and take that liability if you
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have a home that you live in and start
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to turn it into a vehicle to help you by
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performing
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that's okay I'm not saying turn it into
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a performing asset like I don't want you
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to rent out a room in your house that's
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not what I'm asking you to do I'm saying
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if you think about using this house as a
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way to help you start acquiring
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performing assets then we can be on the
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same path so for round numbers let's
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just say the house is worth five we we
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bought it for five hundred thousand
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dollars and we only owe $200,000
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remaining on that house well now I go to
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a local bank I say to them look I'd like
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to get a home equity line of credit on
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my house great they'll assess the
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property and they'll see that you have
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$300,000 of equity and they're gonna
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give you about 80 percent of that 300
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thousand right 80 percent alone to value
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so they may give you or 75 percent it
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depends on the bank so they're gonna
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give you 80 percent now let's just say
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again for round numbers you have two
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hundred thousand to work with again my
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math is off but you follow me I just
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want to say for the home equity line of
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credit the amount that the bank is
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giving you is two hundred thousand
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dollars they're saying the equity in
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your home we're gonna place a second
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mortgage on your home and here you go
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here's a line of credit now you start
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with a zero balance with your line of
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credit and you don't pay anything until
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you actually start running up that bill
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that's different again than the loan
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because the loan you're getting a check
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you're just getting a check for $200,000
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and that interest rate starts
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immediately and now you don't get to
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rinse and repeat you don't get to go
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back to the drawing board and make that
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money over again you've got to pay it
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off and you're done so with the line of
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credit we start with a zero balance and
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remember the reason I love this is
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because it's simple interest it's
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different than amortized loans that you
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have as your primary mortgage right so
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you're amortized loan you're paying that
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interest upfront if you've ever gotten
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those coupons that you used to get when
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you bought your first property I
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remember the very first property I ever
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purchased
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they give me a binder and it had a whole
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thing of coupons that I could rip out
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and send in to the bank and for the
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first seven years they showed that
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ammeter ization scheduled I was paying
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all interest for that first seven or
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eight years of the loan
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that's different than a home equity line
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of credit because you're starting and
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you're paying it like a credit card
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every month and it doesn't accrue in the
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same way that amortized interest does
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and it amortize loan so you're you're
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using two different financial vehicles
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two different financial products in
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order to make yourself wealthy and
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increase your net worth now you may say
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they're self why would you want to use
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this strategy rather than cash well look
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using the equity in your home you're
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leveraging the bank is giving you money
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to use right they're giving you your
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otherwise this house is a liability so
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if the bank is gonna give you money to
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use in order to purchase real estate I
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would much rather use that right yes you
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can pay it back and you want to make
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sure that your tenants are paying back
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the loan so this is the beauty of this
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strategy and again I have acquired more
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rental properties using the HELOC than I
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have any other form of wealth building
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any other financial product private
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money cash on hand I've used my own
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HELOC in my own house to purchase
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properties more than anything else now
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you want to make sure though that your
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leverage point is covered by your cash
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flow so what do I mean well I'm not a
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big fan I would not recommend taking
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your HELOC and going out and doing a
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flip right finding a house in your
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backyard and spending nine months
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rehabbing a house in order that you
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cross your fingers and hope that you can
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flip it to somebody right uh you know a
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young a young family that wants to move
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into it eight months after you've
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renovated it that I would not recommend
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I'm not I'm not a fan of the flipping
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strategy I'm a fan of buying and hold I
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want to hold forever right so when you
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buy I want this you know I want your
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tenant and the cash flow to make sure
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that you're come more than covering the
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amount you're paying back on your heal
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Ock so again if you get a HELOC four
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three three point nine nine percent
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interest right or you know again round
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number is nearly four percent interest
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but your cash flowing like all the
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properties I buy or between like nine
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and twelve percent cash flow so that's a
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nice spread right that's a nice spread
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where I've got enough wiggle room that I
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can cover my
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as expenses and property management fees
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and I still have cash coming in every
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month enough that my tenant is paying
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this loan for me does that make sense my
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tenant is paying my HELOC back not me
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the tenant the cash flow from that
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property is what's covering my is what's
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covering my expenses on this property
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that's the beauty of this strategy and
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that every month I'm increasing my
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equity again into this property and then
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I can go back to the local bank and I
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can say look I now have these additional
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assets I've increased the equity even in
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my own home because you're still paying
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your main mortgage don't forget right
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you're increasing the equity in your own
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home but you're still paying the primary
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mortgage now I can increase that home
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equity loan so we just did that on our
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home in fact we had a lot of equity to
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work with and we just kind of got lazy
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about it and I said to my wife recently
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I said hey let's call up our bank and
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let's reposition our home equity line of
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credit because we had a couple hundred
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thousand to work with let's amp that
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puppy up let's max it out and let's go
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on a buying spree so my wife and I right
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now are using our home equity line of
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credit
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we're buying properties in Ohio we're
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buying properties in our Michigan market
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we're doing all you know we're buying
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we're just buying and we're using the
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bank to do it I mean it's a no-brainer
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so using the bank to add to my net worth
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now how does this happen at closing so
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you may be saying yourself okay I have a
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home equity line of credit and I want to
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found an investment property that I want
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to buy I'm going to buy this house for
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50,000 or I'm gonna buy this property
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for 60,000 dollars it's gonna cash flow
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you know $800 a month how do I closed on
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it well it's just the same as if you're
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paying cash for it
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you're literally have a home equity line
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with a check you would transfer that
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money wire that money to the title
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company on closing day and because
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there's no mortgage involved meaning
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you're not taking out a mortgage on the
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investment property you are writing a
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check from a mortgage you already have
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in place
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you already have the home equity line of
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credit in place so you're just writing a
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check you're transferring the money from
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your bank to the title company at
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closing and guess what now
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you own this investment property free
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and clear now yes your home equity line
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of credit has gone up to 50,000 now
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right it's increase up to 50,000 or
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whatever purchase price on the property
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60,000 now the rent starts paying it
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back you know over and over and over
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again before you know it that house is
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paid off in three years so the bank
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enabled you to build wealth on the backs
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of their own money yes based on the
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equity in your home but it's a killer
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strategy and that's why I love it and so
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really you get to have that credit card
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you get to have those that checkbook
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from your home equity line of credit
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rinse and repeat and keep buying rental
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properties with that money in another
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video series we're going to talk about
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the way in which the tax code and has
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changed now because of the 2018 tax law
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we're going to talk about the
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differences there because there are some
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significant changes so we'll dive into
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some of the nitty-gritty on the taxes
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around this type of mortgage because it
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has changed it has shifted in fact
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Natalie and I wrote a book on how to pay
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off your primary mortgage using a HELOC
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and most of the mechanics are still true
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but we need to certainly update and
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revise the edition to talk about the
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changes in the tax code so that will be
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another that will be another episode we
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will bring to you really soon here on
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the channel in the meantime if you are
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ready to pick up your first rental
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property or your tenth rental property
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that's what we do all day long and my
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company so you can come over to our
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website just go to Morris invest calm
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click on the schedule a consultation
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button and you pick the time that works
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for you we'll jump on the phone for 30
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minutes with our team we'll find out you
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know how many rental properties do you
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currently have how many are you looking
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to acquire what is your overall strategy
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Ben over the past few years and will
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help you get towards financial freedom
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that's what we do all day long and our
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properties are you know turnkey so it's
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pretty it's pretty easy it's very very
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easy to work with so please dial us up I
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cannot wait to talk with you and our
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team is standing by but in the meantime
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I want you to go out there take action
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become a real estate investor
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use all of the strategies that we talked
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about here on the show but you know like
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I said the HELOC strategy is one of my
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all time favorites we'll see you next
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time everyone
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