How We Leveraged Our HELOC
Updated: Jan 13
Do you remember that $75,000 HELOC we got on our house in December of 2021? We intended to use this 75k to help us flip houses, but as you all know that plan was kyboshed in January 2022 and I took a step back to get my real estate license and build my business first.
First, let me briefly explain...
What is a HELOC?
Here's an explanation from a previous Do-over-necks blog post, The 3 Costs to Flipping Houses & How to Pay for Them with Little Cash! (Part 3: Renovation Costs): "A HELOC (home equity line of credit) ... is where you receive a line of credit for 80% of the equity you have in your home minus what you still owe on the house. A HELOC has a very low-interest rate compared to other more common lines of credit, usually 2-5%. Let's break this down! If your home is currently worth 500k, you take 80% of that, which is 400k, and subtract what you still owe on the home (say 330k), which equals 70k in a line of credit."
$500,000 (total equity) * .80 (80%) = $400,000
$400,000 (80% of your total equity) - $330,000 (still owe on the house) = $70,000 max credit limit or loan amount
So, if you were to use/invest/spend your entire 70k, and your interest rate was 2%, you would only be paying $116/month in monthly payments.
(70,000 x 2%)/12 months = $116.
What did we end up doing with our HELOC?
Because we got our HELOC through the bank we currently work with, we got a discount of a locked-in 1.9% interest rate for the first 6 months of the life of the HELOC. After the first 6 months, the rate changes to a variable rate (whatever the current market rate is). Knowing it was smarter to invest this money while our rate was low, we were eager to come up with a plan.
Already having done a LOT of house-flipping research and building a book of mentors, we decided to invest 70k of our 75k HELOC with a house-flipping company based out of Idaho. We would give them the 70k and in return, we would receive 10% interest at the conclusion of the 12 months plus our 70k initial investment.
How did it work?
First, and most importantly, we received a Promissory Note from the company that was notarized by the state of Idaho. The Note spilled out all the details of our contract. A Promissory Note is important because if at the conclusion of your contract, you are not paid back or paid back in full, you can take them to court and the Promissory Note is what will plead your case for you. Do NOT invest in this way without a Promissory Note!
We sent 70k via wire transfer to initiate the investment with the house-flipping company. I have to admit, that was a scary moment! Ha! Just instantly seeing 70k completely GONE out of your line of credit! Yikes. I'd be lying if I said we didn't have some initial shell shock! (But that promissory note is what gave us all the comfort we needed! And the fact that we personally knew and trusted the owner with our money was a huge plus.)
We used the remaining 5k of our HELOC as a reserve to make the payments ON our 70k loan. This way none of the money used to make our monthly loan payments came out of our personal money. However, doing this does accrue a little more interest thus slightly increasing your monthly payment on the loan.
Let's break down the numbers
With a 10% interest rate on our 70k investment, we were accruing $583/month profit.
However, to ensure it was a new profitable investment, our monthly payment on our loan could never be at or above $583.
Over the 7 months that we had our HELOC invested, we paid a total of $1,690.87 in monthly payments on our loan. Each month was a different amount because the rate would change. The lowest monthly payment we had was $177.67 and the highest was $425.08.
As you know, interest rates have climbed a lot this past 2022 year. Once our monthly loan payments got into the $400's (5% - 6% interest rate), we felt our investment could do better elsewhere and we pulled out of the contract without any penalties (per our contract).
How much did we make?
At the conclusion of our 7-month investment, we received $75,638.36 from the house-flipping company. $70,000 of that was the initial investment, and the $5,638.36 was the interest we gained from the investment.
We paid off our HELOC entirely and gave ourselves a Christmas bonus of $5,638.36! Can't complain about that! Though it was a nice 5.6k profit, we do have to factor in the loan payments we were making to calculate our true net income. Let's break that down:
$5,638.36 (investment profit) - $1,690.87 (loan payments) = $3,947.49
After all was said and done, we made almost 4k in passive income within 7 months! Can't complain about that either!
What will we do with our HELOC now?
As much as I would LOVE LOVE LOVE LOVE LOVE to use our HELOC to build a pool, we are on the hunt for a new way to invest this money in the smartest way possible. I have many goals for 2023, and one of them is to continue leveraging our HELOC. I'm excited for what is to come and I'll keep you posted along the way!
How can this help you?
Have you owned your home for a while? Or has it built a significant amount of equity since you purchased it? If so, it might be worth it to get a HELOC on our home too!
You can use your HELOC to invest. You can use it to fund a pool, a whole home remodel, add an addition, or even a casita. You can also use a HELOC as a downpayment to purchase another property!
If this perks your ears, please let me know if you have any questions! I live for this stuff and love helping others build their wealth through real estate.
Your Arizona REALTOR