After tossing around several small business ideas for veterans, Jon finally landed on becoming a real estate investor like me. I had a hunch he’d go in that direction. He’s always had a passion for real estate, even before he joined the Marines. Plus, he likes the feeling of being in control of his destiny—something few jobs, and not every entrepreneurial opportunity, gives you.
Since his home was paid off, he was considering taking out a line of credit (LOC) against it to buy investment property. So, he came to me to talk about it. I’m glad he did, too. A lot of new and would-be investors worry about buying that first investment property—particularly, how they’re going to actually pay for it. And, if they can get access to a line of credit, using it to fund a deal seems reasonable. But, it’s equally reasonable, if not more so, to exercise a little caution. Let me tell you why.
Using a Line of Credit to Buy Investment Property
Before you take out an LOC to buy investment property, there are several things you need to understand about what it is and how it works. First, an LOC is similar to a loan in that a bank or credit union agrees to lend you money with fixed repayment terms. But, whereas you receive the entire lump sum upfront with a loan, you have the freedom to draw on your line of credit as needed. This is a big plus because generally interest on a line of credit only gets levied on the funds you actually use and you only make payments on what you withdraw. And, whatever you pay back immediately becomes available for use again.
Second, there are two types of lines of credit available to you for buying property: unsecured and secured. Here’s the lowdown on each:
- An unsecured line of credit isn’t backed by collateral of any kind. So, not owning a home or even having a savings account, for example, won’t necessarily work against you. If your credit score is high and your employment record strong, a lender may still open an LOC for you. But, since they are taking on more risk by awarding an unsecured line of credit, your interest rate will probably be high and the amount of money you can access will be restricted.
- A secured line of credit is backed by collateral that you provide, which means you can potentially benefit more because you take on more of the risk. Your interest rate, for one, will be lower than if your LOC was not secured. And, that can help to put more in your account since you’re paying less out of pocket. Additionally, the amount of money you’re awarded will be based on the value of your collateral instead of on your employment history, credit score, and whatever else the lender would otherwise need to determine your level of risk as a borrower.
Of course, that’s why the most common form of collateral used to obtain a secured line of credit for buying investment property is a home equity line of credit (HELOC). As the name suggests, a HELOC is based on the amount of equity you currently have in your own home. You may have your house paid off, like Jon, or you may not. But, any equity can be used to collateralize your LOC. And, that potentially gives you a much bigger cushion to buy residential investment property and renovate it to sell later for a profit.
Though the actual terms for using a secured line of credit vary from lender to lender, there is one critical risk that may not make this financing option worth it. If you default on your payments, the lender will seize your collateral. And, if what you’ve used as collateral is your personal savings or your family’s house, that’s exactly what they’ll take. That you make your home loan payments on time or own the house free and clear, like Jon, won’t matter. What will matter to the lender is that they get paid—one way or another. In my book, the risk of losing what you’ve already earned is plenty of good reason not to take out a line of credit to buy investment property.
Instead, consider getting a hard money loan to buy and repair investment properties. Unlike banks and credit unions that offer traditional loans and lines of credit, hard money lenders give cash to investors specifically to fund real estate deals. And, because approval is based primarily on the investment property itself—and swayed little, if at all, by your creditworthiness—you don’t have to fear getting turned down because your credit isn’t that great.
And, though the terms between hard money lenders nationwide will vary like those between traditional lenders, there are benefits to using hard money that usually come standard. For example, you can typically make interest-only payments until the loan comes due, which frees up your funds for buying and renovating your investment house. Plus, approval usually comes fast and, often, so does the cash. And, that can give you an edge over investors working with a slow-moving bank.
But, most importantly, you won’t have to collateralize any of your personal property to fund the purchase of an investment property. The loan is backed by the investment house itself. So, though it can still be risky to borrow hard money, you won’t be risking the roof over your head if you’re unable to pay the money back.
A Better Alternative for Funding Deals Fast
Thankfully, Jon decided to pass on the idea of getting a line of credit to buy investment property. After we talked out the details, putting his home up for collateral simply lost some of its luster. But, as for getting a hard money loan, he didn’t know where to begin. And, most new investors don’t unless you start out with a network that can guide and advise you—or, an investing friend, like me, who can tell you where to find everything you need. So, for Jon, that’s exactly what I did.
See, I’m an independently owned and operated HomeVestors® franchisee. And, as a franchisee, I have access to all the help that I need to get my deals financed as quickly as possible. I can connect with my network of fellow franchisees if I need tips on who to turn to for funding. And, in the beginning of my career, I picked their brains all the time.
But, now, I can also connect directly with hard money lenders nationwide through HomeVestors® proprietary software, UGVille™. All I have to do is enter a few details about my deal into the lending portal, hit send, and wait. But, I don’t have to wait long. I get competing bids from previously vetted lenders fast, which means I get access to money for my deals fast, too. And, that is a much better alternative to risking my house and home.
For access to some of the best options on how to fund your real estate deals, contact HomeVestors about becoming a member of our network of HomeVestors® franchisees today!
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