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

100 Comments

  • HeavyHandz Gaming

    I am 27 and Co-Own a house in east Texas worth 97k and the lot/land its on which is another 11.5K. Totaling 108k. (Using tax statements for these totals). I am wanting to purchase my first investment property with a HELOC. What price should I aim for in the new property? I am wanting the HELOC to cover the full amount of the new home so I will not be stuck with mortgage plus the HELOC payments. So maybe around 80k for the investment property? I need help getting with a good property management company, and also figuring out the fastest way to get the HELOC paid back off to start rolling in the $. Can your team help me?

  • Not Me

    My house , according to Trulia, is worth $150,000. I have $54,000 remaining balance. So my equity would be 100,000? But the bank would only offer me up to 80% of the 100k? So I would get a credit line of $80,000?

    Thanks.

  • Josh Smalley

    With a Heloc, you can take that money and apply it anywhere, right? Like across state lines to investment properties?

  • Johns Town

    Do not do this method unless you make over what your mortgage is, have no other debt, have no plans on remodeling. The math is generally right but risky. If an unforeseen event happens, you can be upside down very quick.

  • Silver Stone Malik

    Hi I need equity loan for debt consolidation problem is I have already have 2nd mortgage variable 10000 loan with private company I want to buy out .too much interest changing every year plz help me out my own bank is not helpful because of my credit …Canada

  • Nel Di

    IS NICE TO USED THE HELOC BUT BUY A GOOD PROPERTY NEED TO KNOW WHAT PROPERTY GIVE YOU GOOD CASH FLOW FIRST. AND STUDY THE AREA FOR TENANT ,JOBS IN THE AREA AND GET A GOOD PROPERTY MANAGEMENT .THANK YOU FOR SHOW THE POWER OF THE EQUITY.

  • Joseph Bianchimano

    Hello Clayton , are you still working at Fox News ? i Have a mixed use property in what i think is a Class A neighborhood , Abington Pa , The property was a fixer upper in 1986 , i was able to purchase at a very decent price , however i also rehabbed the entire property , and was able to maximize the rental income per unit , i have a equity line of credit , but never used it to purchase other properties , i have approx 365,000 in equity , i also own another class B area ranchplex 3×2 rental this property is paid off , and completely rehabbed i own with my cousin 50% , i have approx a 50% equity of 135,000 in this property , and i also own another desirable class B row home in philly with approx 50,000 equity , i need to make this equity ,pyramid ,into possible other assets ? what would you do with these assets ? im 63 yrs old , and conflicted with what i should do , i like the Passive income , and also need the passive income , these assets have all had a good rental history , with very little vacancy, only 3 evictions for the past 32 years, thanks

  • Wayne

    I've shopped around for a HELOC and every company keeps steering me towards a home equity loan instead of a HELOC. Why is this and does it suit if I'm trying to buy investment property?

  • Selene Chavarria

    Hi Clayton! I got a heloc but they don’t let me paypark my paycheck or make any pmts from there so it’s getting harder to lower my debt. What should I do?

  • Tigers chic

    Can you do a vid to walk us through a real life example of how the numbers work? Theoretically I understand this strategy works but what I don’t understand is how real costs can be covered plus make cash flow on top of that while paying back the HELOC in a short number of years…how do you figure a realistic payment out? Using 50k in 3 years example (not even including things like insurance/taxes/improvement/repairs) the payment would be $1388 per month in order to pay back in 3 years. This is already pushing an unrealistic acquisition amount and payment in my area so sincerely wondering. Also do you wait until HELOC is paid back in full to purchase another property?

  • Zuwadie Nieta

    I'm so interested in turnkey properties as well but my credit is bad. I have a
    collection placed on my report witch is gonna be there for 7 years

  • Benjamin Friesen

    So if one gets a HELOC on their primary residence the new monthly mortgage payment for that property becomes an entirely new mortgage payment that is equatable to the old mortgage added together with the interest of the HELOC(based on how much actually used)? Or are payments of mortgage and the HELOC treated separately? I'm trying to get a sense of how much more per month a HELOC might cost me on my current mortgage so I can plan a rental strategy.

  • John Alvarado

    Does this only work if your HELOC is large enough to cash purchase an investment property? For instance if your HELOC is only 20K and the investment property your looking into is 100K could you use your HELOC as a 20% down payment and secure a mortgage on the investment property and still cash flow?

  • S I

    If you are getting a HELOC from the bank and putting that as cash towards a rental property that is still considered as 0% down payment correct? Because all I have done is taken money from somewhere and given it to someone else and I am still liable to pay that amount.

  • palfredo05

    Can you explain the difference between getting a HELOC vs a normal loan on a rental property…my assumption is that if you buy a rental prop say for 350k and your HELOC doesn’t cover it all…wouldn’t you still need another loan…? I’m new to this whole real estate stuff and stock

  • Tony J

    From what i understand & please verify – The new 2018 tax rule (in effect from 2018-2026) allows interest paid from the HELOC to be tax deductible only if the money is used to buy, improve or build the home that secured the loan. If I borrow against my primary residence to purchase a rental or vacation property none of the interest paid to the HELOC is deductible. Each property must secure its own loan.

  • Santos Marquez

    OMG, Clayton. I've got to get in on this. My situation now I've been paying off my primary mortgage for the past 20 yrs w/only 2x refi's but I've always been skeptical about using the equity in the house. Growing up I always heard not to borrow against the house. Now I see that's not true! My house is worth $600k & I owe $260k. So this strategy sounds like it's right for me.
    I think I'll be needing to contact your team soon.
    Thanks,

  • Luis Gomez

    Hello. Newbie here. What if my mortgage is already paid off? Would it be wise for me to get a HELOC to buy and hold another property? I want to invest, but don't know the "Real Estate" language yet, but willing to learn. Thanks 🙏🏻

  • eric allen

    Would you use a heloc as a down payment or use it to buy the new investment property in full, and the heloc acts as the mortgage?

    If you use it as for example a 20% down payment then you have a new mortgage and the heloc to pay. Is that not more expensive monthly?

  • 67chevelle Malibu

    Clayton question for you. I'm interested in doing a heloc but I dnt have enough equity to pay in full for a property. is it still a good I idea to use a heloc for the down payment? to get me started in the business?

  • jeffrey vlk

    My plan is to find foreclosures/short sales selling for 80% of their vale, put 20% down, then when the time comes Cash out refi my 20% down payment and put it into another property and repeat. My question is can I use a HELOC to pay my 20% downpayment on a property at 80% of value and then cash out refinance and pay my HELOC off?

  • Panda Love

    I have a question, If I using HELOC, for example, I get $300K from my current home equity, Interest rate is 5%.
    Then I use $300K to pay another let say $600K property's down payment, and up on that it created a new mortgage, 300K new debt, interest rate is another 5%.
    Now the question is, if the investment property can not produce more than 10% of 600K total debt return, then it become a negative cash flow….
    How to get through it? Maybe I miss something or maybe my math is messed up… Plz tell me. Thank you

  • camarojoe1997

    This is a wonderful idea to buy the house but wouldn’t you have to take out a separate loan of roughly 15-20k bc the property you purchase is more than likely going to need to be rehabbed?

  • thecoltsnohuddle

    Novice level here: How do you avoid commingling funds using this method? Do you designate the Heloc account to your LLC?

  • Larry Smith

    I'm super skeptical about the claim you can payoff your HELOC from your rent in 3 years, thats more than a stretch. My thoughts would be why not buy the home with the HELOC, then put a delay financing mortgage on the property. Pay off the HELOC you borrowed to buy the the home. Then repeat.

  • John Galt

    Seems super risky to calculate ROI with entirely an entirely variable interest rate. Would it make sense to Cash-Out Refinance after closing and some minor repairs? Does the HELOC trash your DTI for such a refinance?

  • Little Lotus

    Is a HELOC rate of 7.75%-8.25% good or terrible? Or is that the normal rate. I’m looking at purchasing a rental in Texas at the moment. I really appreciate your advice and insight. You both are so awesome😊

  • Alt Name

    Question:

    If a person has a $300k home, still owes $224k, so roughly $76k in equity. If the bank would loan 80-100% of that equity, can a person still use "just" $60k to start doing this?

  • nojokeauto

    Can somebody explain if my 30year mortgage is fixed 4.25%. Why would I get a helco that is over 5% to help pay off my existing 4.25% mortgage?

  • Rita Dougherty

    I want to know more about this… I'm just starting out in real estate investing and I don't really know the questions to ask… Right now I'm dealing with a commercial lender on a property I'm working on buying… Would he understand what heloc is? Also if I have no mortgage on my house does heloc still apply? I've never heard of this and am very interested in what this is about

  • Georgeann Baxter

    Love this video. Very smart man. I bought a home with a heloc. At the time banks were scared to give loans for investments. Heloc was recommend by the guy at the bank. The interest rate was lower than a mortgage and the loan balance came down quickly.

  • Cali Valley

    Great info, I have been trying to buy properties in the mid-west from California. I get beat out every time by cash buyers, I could have been using HELOC as my home here in California is payed off. Soo many opportunities wasted.

  • Matty Ice Sells Cars

    This is the best way to buy rental property! By leveraging your equity. Otherwise it’s just dead money!

    However, you DO NOT get 80% of your equity in a HELOC. The math is you do 80% of the value of your home MINUS whatever balance you owe. That is what you can borrow.

    For example:

    $500k = Value of your home
    $300k= Remaining balance owed on your home

    80% of $500k= $400k

    Therefore you can borrow $400k-$300k= $100k Line of Credit

    Other than that, this Man has the right way of thinking!

  • Eric Smyth

    Omg thank you so much for this video

    My friends and I were struggling on how to add Helocs into Monopoly!

    This video explanation gave us a creative way to add it to the game!

  • Martin Young

    Hi Clayton! Martin here! This segment is very clear and concise! Yes, I used a HELOC to purchase my 2nd property, a triplex! I put 80% down & used a HELOC to purchase the rental. Once I get the HELOC paid off, I want to start searching for another rental. Keep the great work! P.S. – I love Fox News! 🙂

  • DDB

    I'm About to buy my first home soon. Could I buy a property below market value, fix it up and gain instant equity that way?

  • C B

    Ok say your primary residence is worth 100k, paid off and a Heloc is needed to fix up the property a bit & you want to purchase auction properties in full to fix and flip or rent out. Would that be a good idea if still working and able to cover the payment of the Heloc even without rental income?

  • MrGiggity890

    You’re only making yourself wealthier if you’re cash flow positive, the equity you’re building on the second property is prob just trader for equity you’d be building in your own property

  • Juan Ruiz

    What if I only have 30k in equity should I wait to build more equity or should I use what I have to put down payment on a rental property

  • Sniper Paint Correction

    I became confused towards the end.. when you use the 50,000 line of credit to buy your next property. That property is fully paid off right? You owe nothing. So the rent from that property is paying back the line of credit? Let's say I buy another property. I would have two tenants paying it back quicker?

  • ulise melendez

    The property next door to mine just came in the market and is a brand new property. Is 630k. My banker require a 10% down The question that I have is, my property appraise at 750k , I owe 619. Would i be able to take out a heloc for the left of the value. In order to use the 10% to acquire the next property

  • Cleo Patra

    Thank you for sharing. Will it make sense to use a HELOC as a down payment or is this strategy only if you are paying cash in full for the property?

  • Vick Shahi

    i have question reagarding Heloc from the investment property.i just purchase the duplex with 25% down on april 2019. Can i apply for Heloc form this property and invest to buy new house?. Do i have to wait 6 months to get heloc? and last one,is it hard to get heloc from the investment property?

  • Jonathan Ruiz

    and is he saying to buy investment properties cash paid in full with HELOC or can you have a mortgage with 20% down?

  • jay c

    I bought my rental properties cash should i apply for a HELOC and buy another cash rental property..or should i try to get a mortgage?

  • Kendall Adkins

    This guy says your net worth doesn't include your house. Don't listen to this guy. Not to say the approach can't make you dollars, just that this guy lost his credibility with that statement.

  • Mithun Das

    This strategy works only if you built a lot of equity on your house and the HELOC itself pay for an investment property.

  • Mauricio Bertola

    I have around $100k of equity on an investment property. Can I get a heloc of that ? I mean, can I get a heloc even if I don’t have any primary residence and only have rental property to buy another rental? I mean, can I get 100k heloc from my rental condo to buy another rental condo ? Thank you !!

  • Tee S

    I tried googling this information and reading about the difference between the HELOC and the loan and none of the articles were as helpful or educational as this video. THANK YOU!!!!!!!!!!!!!!!!!!!!!

  • Code Blue

    But what is the payoff strategy? If I buy a home with a 200k HELOC at 4%, how much I am paying back each month? What is my monthly payment?

  • BROWN BROWN

    I got my heloc for $150gs but truthfully I am scare to start using it because I don't know how my rental will work out, specially now days. My heloc is at 5.7% . Thinking on purchasing an $80,000 property with a montly rental of $1100 per month. Can anyone help me do this math.

  • Laura Tabarez

    Would you recommend a HELOC or cashing out a 401k for your first investment property? Thinking of buying my first rental property this coming year.

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