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How do you get that elusive 20-30% down payment - a huge barrier to real estate investing - to buy your next property? And if you can find a way to save up that chunk of change, how do you get started on saving the next down payment? 

This is a financial wall that many can't seem to break through. Let's try to think of the down payment as more of a hurdle, though. Today, I (Alan) am going to walk you through how to use your HELOC, or Home Equity Line of Credit, to have access to an infinite down payment solution. (Side note, I also have 29+ other ways to buy real estate creatively in my BROKE Method to Real Estate Investing Course.) 

Ok, so first things first, a HELOC-hack like this can only be done if you have equity in another property, and yes, that property can be your primary. Equity is the difference between what a property is worth minus what you owe on it. And you access typically 70% or more of the value of your home.

A quick example: Let's say your primary is worth $400,000 and you have a a $180,000 mortgage on it. Your equity is $220,000 ($400,000-$180,000 = $220,000).

Now take 70% of  the $400,000 home value to figure what the possible mortgage amount you can get.  In this case, it's $280,000. So, after you subtract your $180,000 current mortgage from this $280,000 limit, you can get a line of credit for $100,000 to be spent however you like. 

A HELOC is literally a line of credit on this equity, similar to how a credit card is a line of credit, with a limit, that you can spend however you like. And also like a credit card, if you don't spend it or access it, you don't have to make payments on it. You only pay interest the amount that you use (draw). It's a great way to have access to a down payment for when that special property comes across your plate, whenever that may be.

This untapped equity can also be looked at as having $100,000 of value locked in a property that is actively not making you any money. A HELOC can access that money so you can re-invest it to make more money. And all you have to do is go to your local bank and request a HELOC on your home and you'll get very little push-back.

I would maybe work on a nicer tone and delivery, but this is indeed the idea. Now, let's get your main worry addressed first: 

Borrowing money is risky.

That's one way to view investing. I think putting all cash in every deal is riskier. Cash purchases put all your eggs into one basket.

I can buy one house for $100,000 in the Mid-West or Southeast that rents for $1000. (I, Alan, have bought over 50 of these. Tom has bought over a dozen. Lauren has purchased none...yet.)   

If I bought this in all cash, I could cash flow about $700 ($300 going to property taxes, insurances, etc.). If I bought this with a mortgage, I could cash flow about $150.

Or I can buy 5 of them if I have mortgages, which means my cash flow is $750. I actually make more money with more homes.  

And if one is vacant and I only own one, then I lose $300 a month into it's filled. If I have 5 and one is vacant, I'm still cash flowing $600 a month. This is allows you to scale and reduce risk at the same time.

Ok, I guess you skipped over the part about how it reduces risk and I'd say "gambler" is a little bit of a stretch, but all investing has some risk. Let's highlight the biggest risks for HELOCs so you aren't caught by surprise:

• HELOCs are variable interest rate after 1 year which can go make payments go up and down
• HELOCs are in essence a second mortgage on your property you are tapping for equity
• HELOCs are interest only, so you should pay more than the minimum balance each month
• HELOCs can be pulled or stopped by a bank at any time if they find it necessary (rare, but possible)

So, with those important points behind us, this is how I used my HELOC to get 100% financing on a $1,000,000 duplex in Brooklyn, NY, and how you can replicate it in your market.

Step 1: Apply for a HELOC at local credit union

Credit Unions or Community Banks often have the best HELOC-rates, but I encourage you to shop around. After some renovations to my property I knew I had added value to my duplex, but wasn't sure how much value it would come out to be on an appraisal.

When you apply for a HELOC, the lender will send out a third-party appraiser to determine the value of your property. After evaluation, and some luck on a very favorable valuation, I was granted a $300,000 home equity credit line to use as I wish.

Your numbers aren't going to be the same as mine, but even removing a zero and having access to $30,000 in home equity, that's a 20% down payment on a $150,000 rental house.

Great, and I understand, yes, your market might not have $150,000 homes and which is why we also have a course for Long-Distance Investing on a Budget.  There is no reason to limit your opportunities to just your city.

Step 2: Find a property that will cash flow with 100% financing

This HELOC now gave me a $300,000 to use however I want.  And I wanted to use it to buy real estate. But the right property had to be purchased that would do the following:

• Rental income that covered the HELOC's monthly interest payments 
• Rental Income that cover the new mortgage on the property I was purchasing
• Additional Cash flow to pay off the HELOC balance in 5 years

I found a duplex for $1,000,000 that fit this and I had the means now to purchase with 100% financing.

How so? Well the capital stack on the duplex looked like this:

• $200,000 down payment coming from my 5% rate interest-only HELOC ($800 a month payment)
• $800,000 at 6.5% mortgage rate on the new duplex ($5,000 a month payment.)

Total expenses with additional landlord costs were close to $7,000 a month on the entire 100% financed million-dollar property.

The total rental income was $9,500. This left me a cash flow of $2,500.  Not too shabby!

Step 3: Pay off HELOC balance as fast as possible

The biggest risk in this strategy is that the HELOC rates may change after one year, so I wanted to pay down the HELOC as fast as possible before the rate could be adjusted.

I was already paying $800 for the interest-only portion of my HELOC payment, and I would tack on $2,500 each month to reduce the principal.

That meant in the second month, I only had a $789 in interest payments since I no longer had a $200,000 HELOC balance but a $197,500 one.

And then I could put $2,511 towards additional HELOC principal pay down. This created a huge snowball where each month I got more cash flow and in return, was able to pay more down on my HELOC balance.

This snowball effect along with increasing rents year after year allowed me pay off the entire HELOC balance in 3.5 years. It would have taken 6 years without increasing rents.

Step 4: Rinse and repeat

The result of this for me was:

• $200,000 of stagnant primary home equity was put to better use
• I was able to purchase a $1,000,000 duplex for 100% financing
• In 3.5 years, the duplex paid off it's entire down payment from the HELOC
• The duplex makes another $800 in cash flow now that HELOC payments are gone
• I now have a fresh $300,000 HELOC balance waiting for me to go buy another property

You can do the same regardless of your line of credit amount. 

Back to the risks involved on this strategy, let's work through some worst case scenarios so you can feel really comfortable on using it:

• What if HELOC interest rates go way up in years 2 and beyond? 
  • Yes, this is a risk. If this has happened on my deal, I still had $2,500 in cash flow to cushion for this possibility and it would have probably extended my HELOC pay down to 7-8 years. Still considered a win!
• What if rental rates dropped and cash flow dropped below $2,500? 
  • Same has above, I had a property with enough cushion that I could still make great gains even if rent went down $1,500 in total.
• I guess finding the right property to utilize this strategy is less of a gamble and more of a calculated risk, right?
  • Bingo! And it takes being ready with a HELOC ready to go for when that deal does come across your plate. Getting a HELOC can take 45 days to get going which may ruin your chance to buy that perfect property that fits this plan.

Glad to hear it!  Now you can grow your real estate portfolio indefinitely.

Summary

• HELOCs make for a wonderful down payment tool
• HELOCs have risk in that they are interest-only payments and variable rate after one year.
• Hinges on finding a property than will cash flow with 100% financing
• Your may have to invest out-of-state to get the best deals