Should you use a line of credit for real estate investing?

In this blog post, Ryan discussed when you should use a line of credit for real estate investing. 

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Should you use a line of credit for real estate investing?

The real answer to this is it depends. It depends on what you're investing in. So let's talk about a few scenarios here. So line of credit.

There's a few different lines of credit that we can be talking about here. We could be talking about a HELOC, home equity line of credit, which is usually a second loan that you have on your house. K? So oops. That's a horrible house, but oh, well. So you've got a HELOC. The other thing that you can have is a line of credit from a bank.

These are less common, but they do business lines of credit. The other thing we can be talking about is a credit card. A credit card can be used as a line of credit. It basically is a line of credit. So you can convert that into cash and then wire that money or use that for type of an investment.

So these are your most common business line of credit. Your whoops. Credit card.

Credit card and your HELOC for a second. That's really what we're talking about when we're talking about line of credit. So then the next thing is, what would you use this for? Okay. So you could use your HELOC, your line of credit. You could use it to buy a property.

Typically, you don't have enough money to buy the full property, so it's typically a down payment or it takes care of the rehab, repairs on a property or something like that.

That's one thing that you can do. The other thing you could do is you can actually lend your money. Okay? So you can take off these and you can lend at a higher interest rate. So let's say, for example, you had a line of credit of five percent and you could do a hard money loan at fifteen percent and you would make a ten percent spread.

Should you do that? Maybe. We're gonna talk a little bit more about this.

Here's the most important thing. Anytime you're using a line of credit, you're using leverage. Okay? And you're using leverage to create opportunity, which is a good thing. It can also be a bad thing if you're investing in the wrong type of thing. So anytime I'm dealing with short term money like a line of credit where it's a variable rate, it can go up and down, I wanna make sure that I'm investing in something that's short term. K?

I also wanna plan on this short term investment not working out. So let's say that I did a loan for six months. I'm gonna make sure that I have twelve months worth of payments to pay this line of credit that I didn't lend out so that I have the cash to actually make those payments because there's a good chance that if something went wrong, I'm the one that's going to be happy to make those payments.

The same thing. I don't wanna use my HELOC on a long term rental property.

I would use a line of credit on something short term, so I'd use that money to do rehab or to close a deal that I'm gonna fix and flip. But I don't wanna do that. It's something I'm gonna hold long term. And the reason for that is these rates are up and down, and they change all the time.

Sometimes your HELOCs can be fixed for a little bit, but they are going to have changes anytime you're talking about a line of credit. So, the first thing I'd say is leverage is a double edged sword. It can cut hard, and it can also grow your wealth. So you've gotta make sure you're making a sound investment.

The second thing we're talking about here is make sure if you are using it, you're using it for a short term investment, not for a long term investment if you're using a line of credit. And the reason for that is the rate can change. The reason for that is you're making those payments on that. So I think anytime you're dealing with if you had some money to buy, like, a wholesale deal that you're gonna sell quickly, or sell that paper and you needed some money really quickly to put down, to tie that deal up, a short term loan, it could be, something good if you did that, or buying a property, coming up with the down payment, the rehab, or anything else you want.

Those are some ways that you could be using a line of credit in a good way as long as you're buying a solid investment and you're investing in something that is a short term investment, not something that's a long term investment.

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