Creative financing for real estate investments: revolving line of credit
Creating a line of credit
Growing your real estate business is an exercise in thinking of creative new ways to raise capital so that little to no money comes out of your pocket. The less you pay out of your own money, the more leverage you have and the better chance of generating sizeable profits on every trade.
A powerful method of raising capital is to establish a revolving line of credit with one or more financial institutions. You may want to start with your local bank where you already do business.
Let’s say you have a savings account that has $5,000 or more in cash in the account. Take out a loan against this amount (savings is the collateral) and take that $5,000 to another bank and deposit it, and take out a loan against that $5,000. After a few weeks, pay off the first loan with the $5,000 from the second loan. Once you start doing this a few times and have built up your payment history, you can apply for a revolving line of credit to help finance your business. (There are investors who have worked this plan with as little as $500).
The key here, of course, is to build a solid reputation for getting small loans and paying them back quickly. From there, you increase the size of the loans. This kind of integrity helps the officers of financial institutions a lot. They will be eager to do business with you.
The benefits of a line of credit is that once it’s set up and established, it’s ready and waiting for you to use it. There will be no waiting or forms to fill out. You can negotiate your real estate deals with much more flexibility and confidence, knowing you have the cash to close quickly.
Line of credit with mortgage guarantee.
If you own your own home and have equity in it, you have the cash to grow your real estate investing business.
A home equity line of credit (or HELOC) is similar to using a credit card in that it has a credit limit. This limit is determined by your creditworthiness and the amount of equity in the property. It’s a simple process, once your line of credit is set up, transfer funds from your HELOC, or even write checks directly from the account. The good thing about a HELOC is that interest rates are often lower than cash-out refinance mortgages, and there are tax advantages, too.
The only interest you pay is on the money you’ve used, not the full amount of the loan. The same goes for payments: you only pay for what you have used. At a future date, you may be able to renegotiate a higher line of credit when your home’s equity increases, especially if you’ve made payments above the minimum on time or made improvements to your home.
Home Equity Loan
When it comes to your home equity, there is another option that is similar to a HELOC, and that is a home equity loan. This type of loan uses the equity in your home as collateral and is completely separate from your mortgage.
With a home equity loan, you may be able to borrow 90% or more of your home’s value. One of the great advantages of a home equity loan is that you have the option to pay off the loan early without penalty.
No matter which path you take with regard to using a revolving line of credit or using your home equity, with this available money at your disposal, you are well equipped to negotiate the best deals on discounted properties. When you find that willing seller, you can put cash on the table and close quickly. And, almost always, you will be able to get the best price.