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The past two years were absolutely phenomenal for the mortgage industry, fueled by record low interest rates, and rising home prices, homeowners cashed out an astounding $1.2 trillion in refinancing during 2021 alone.
In markets such as these, a home equity line of credit offers a great opportunity for rental property owners to increase their returns astronomically while recouping all of their initial investment.
So, what exactly is a home equity line of credit? Let’s assume you own a property worth $100,000, on which you owe $50,000, leaving you with equity worth the remaining $50,000.
This equity does not produce any returns, and neither can it be spent, however, with a HELOC, you can access this value right away, often as an interest-only line of credit, on which you will only be charged for what you use.
This amount, if used wisely, can add substantial value to your personal finances, properties, and other assets, generating a much higher return on equity than just idly laying as a part of your home equity.
When it comes to smart use cases for a HELOC, here are some tips and strategies that are often shown to yield the most attractive ROIs for borrowers, setting the stage for a robust financial future.
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Reinvest in Your Property
A common use case for home equity lines of credit is reinvesting, or remodeling existing properties to further enhance their values. Investing money to either revamp, or revitalize a property is a great way to spruce-up rentals, as well as sale prices if you’re looking to sell.
Even though a home remodeling loan can get you there, a HELOC offers a much lower interest rate, and is far more convenient, making it the funding source of choice for most homeowners.
Debt Consolidation
If you have other high interest debts, such as student loans, personal loans, or credit card balances, it makes great sense to consolidate all of them with one home equity line of credit.
This not only spares you the stress of having to deal with multiple loans, banks, and institutions, it can also save you substantially when it comes to interest rates.
Unlike other loans, an equity line of credit is similar to a credit card, allowing borrowers to withdraw only as much as needed, and charging interest only on the amount withdrawn.
Borrowers can further choose to only pay the interest throughout their draw period, bringing much needed flexibility for individuals working on their debts, or getting their finances back on track.
Zero-Down Property Investment
HELOCs have long been the holy-grail for property investors, allowing them to use the equity accumulated on one property as down payment on a conventional loan while acquiring a new rental property.
If you have no additional debts, and no further avenues for home improvement, this is an option that often yields the best ROI when deploying HELOC funds.
In fact, during prolonged bullish markets, massive real estate empires have been built on the backs of easy credit available on home equity.
Small Business
A more riskier proposition for your HELOC funds is to deploy it on your small business, which if works out well, might generate the highest rate of returns compared to all others on this list, but the chances of failure remain just as high.
If you already have a business running, you can use HELOC to either fund purchase orders, or invest in fixed assets that can enhance values in the long-run.
The Takeaway
As wonderful as home equity lines of credit can be for middle class homeowners, the risks are just as high, especially when you realize that this is an instrument of leverage, and without due consideration, it can lead individuals astray financially.
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