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How to Use HELOC Home Equity Line of Credit Buy Property Build Wealth

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  • One real estate investor used a variety of strategies to obtain an upfront payment to build a portfolio.
  • He used the Home Equity Line of Credit (HELOC) to fund his first investment property.
  • He also took out a 401(k) loan and used a voluntary IRA.

Upfront cash is required to purchase property. Most require a down payment and money for closing costs.

You may need more cash when purchasing an investment property. This is because most mortgage lenders require investors to put at least a 20% down payment on a traditional fixed rate loan. On the other hand, if you’re buying a prime residence, you may only get a 3.5% discount. FHA loan — and sometimes even 0% VA loan.

There is a big difference between a 20% drop and a 3.5% drop. On a $250,000 house, you’re looking at a $50,000 down payment and a $8,750 down payment.

Getting tens of thousands of dollars in cash was, and still is, a barrier to entry for many new real estate investors. This is the problem one Virginia-based investor faced when he began looking at investment properties in 2016.

Mark, who didn’t want to reveal his last name for privacy reasons, didn’t have a lot of savings. In 1998, after ten years in the Navy, he began working as a police officer in Virginia. His starting salary is $23,000, he told Insider:

Yet he managed Building a 25-unit real estate portfolio in about four years, an insider confirmed. Currently, he and his wife consider themselves financially independent, with the couple living off various investments. They haven’t worked since moving to Florida from Virginia in 2021.

Mark, now 55, used several different strategies to get his upfront money when building his portfolio.

1. Bought my first rental property using HELOC

Mark’s first investment purchase was a $100,000 single-family home in the Shenandoah Valley, Virginia. That he dates back to 2017. He estimated that he had about $25,000 in savings at the time. He paid off his primary residence in 2015 and built most of that his nest egg after not paying the mortgage.

Instead of using up all the cash to cover the 20% down payment and closing costs, he got it. home equity credit line (HELOC) gives you access to cash by borrowing against your home’s current appraisal value. Think of it like a credit card. There is a limit on how much credit you can borrow for a period of time called the “draw period,” which is usually 5 to 10 years.

Most lenders let you borrow up to 85% of a home’s value, but Mark wanted a modest HELOC. He borrowed his $30,000 from the bank and used the limit of about $17,000 as a down payment on the property purchase. He covered his remaining initial expenses with the savings he already had.

“I remember sitting in the credit union office and asking, ‘Once I get this HELOC, can I use it as I please?’ And the woman said, ‘Yes, whatever you want.’ It was like,” recalls Mark, who closed the house in January 2017.

He said he was making about $220 a month in profit once he secured tenants and started collecting rent steadily. He saved some of the money and used some of it to pay off his HELOC balance.

HELOC terms vary, but typically have repayment terms of 10 to 20 years and a floating interest rate.

2. He withdrew from the 457 program after retiring from the police force.

Mark had been saving for the 457 plan since joining the police force in 1998. This is a tax-advantaged retirement plan similar to a 401(k), but with one major difference. When you retire or retire, you can access your money without having to pay a fee (with a 401(k) if you withdrew it earlier). 59 ½ years of age will be charged a penalty).

Mark retired on April 1, 2018. That meant he could use his $65,000 that he saved on his 457 plan. After taxes were deducted, his balance was about $45,000. he said:

Mark Virginia Investor

Mark and his wife quit their jobs in 2021 when they moved to Florida.

Provided by Mazuke Finance

He used nearly all of that money to purchase his second investment property, a $199,500 triplex in Virginia.

He closed on May 31, 2018. It became his best cash flow property at the time.

3. Transferred Roth IRA money to Self-Administered IRA (SDIRA)

By the end of 2018, Mark owned six rental units and was enjoying the property buying process. In addition, he generated positive cash flow and began to understand how real estate investing can help build long-term wealth.In 2019, he said, “I wanted to build a little momentum.” rice field.

While he continued to add to his savings rapidly thanks to a low cost of living and rising rental income (plus working part-time at the post office and the local YMCA after retiring in 2018), he I didn’t have unlimited cash to work. When.

At that time, he was watching a lot of real estate content on YouTube, and from one video, Buy property with an IRAIt can be a complicated strategy — it requires a self-directed IRA and has stipulations like you can’t live on the property — but he decided to try it.

Mark sold Roth IRA shares, transferred them to self-directed Roth IRA, and purchased turnkey properties within SDIRA for cash. (A turnkey property is a home that is fully functional and ready to rent.)

He and his wife are set to do the same with the Roth IRA in 2020. They sold regular Roth shares, transferred the money to his SDIRA, and paid cash for another turnkey property.

4. He used a 401(k) loan to execute his BRRRR strategy

If you have money in a 401(k) plan, you typically won’t be able to withdraw the funds until you’re 59½ years old, and early withdrawal fees will apply. However, there are some exceptions. A 401(k) loan allows him to borrow money from an account, with interest, and pay it back within five years. This is what Mark and his wife did to access cash for a property they bought in Birmingham, Alabama in 2019 (he didn’t have this kind of retirement account, but his wife worked in the factory).

“There are limits to how much you can withdraw from your 401(k),” Mark explains. “The limit has since changed, but when we went it was a maximum of $50,000. You can withdraw money from your account without penalty, as long as you pay it back with your paycheck.”

keep in mind the possibility Potential Setbacks with Using a 401(k) Loan: You’re using your future retirement savings, which could interfere with your savings progress. I am losing money on compound interest. Failure to repay the loan on time can result in tax penalties.

Mark and his wife used their 401(k) loan money to buy a property that needed a lot of work. BRRRR (buy, rehabilitate, rent, refinance, repeat) strategyBy buying a bad property, reselling it, renting it out, cashing out the property and refinancing, you can get the funds to buy another property and repeat the process.

Mark bought a $24,000 house and spent $22,000 on renovations. Shortly after he completed the renovation, the house was valued at $77,000 and he said:

He used most of those funds to fully pay off his wife’s 401(k) loan balance. This was slightly less than her $46,000 his wife withdrew as he was paying off the balance every two weeks.

“BRRRR was successful because we owned a rental house with tenants and walked out. We didn’t spend money out of our pockets,” said Mark, who calls the property a “free house.” rice field.

maybe risky strategy, but. Especially now, he pointed out: “Property prices are stagnant and some markets may be backing down a bit, so doing a BRRRR is a little bit more risky than it used to be. increase.

“If someone is in the same situation as I am, the primary housing is paid off, they live cheaply, and they just need a little help. at an interest rate of

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