Tag: Real Estate Investing

Invest in Real Estate and Other People Pay Your Debt

Imagine that you have the chance to own something that might be worth a lot of money down the road.

To buy this thing, you will need to pay 25% of the purchase price. The other 75% of the price will be paid by someone else.

Your job is to take care of that thing and keep it for a long time. It won’t be easy, but if you can handle it, you’ll wake up years from now owning something outright that is very valuable.

So far, this sounds pretty good, right?

Of course, there’s a catch. That person paying for 75% of the item will want to be paid back. He’ll want to earn interest, too.

You might be thinking that this opportunity doesn’t sound so promising anymore. Having to pay off that debt might be enough to convince you not to move forward with buying this thing.

You’re smart to be thinking about the debt. I could understand if the prospect of paying back a debt like this didn’t appeal to you. Who really wants to use their own hard-earned money to pay off debt anyways?

Fair enough.

But, what if I told you that other people are going to pay back that 75% (plus interest) on your behalf?

Even more, while those other people are paying back the debt, you still get to benefit from owning the item.

Does that change how you’re viewing this opportunity?

Maybe now you’re thinking that this is too good to be true?

Nope.

This is exactly how real estate investors generate long-term wealth. They buy a property using a loan and then pay back that loan using other people’s money.

This example leads us to the next main reason I invest in real estate:

Other people pay off my debt.

When you acquire the right rental properties, your tenants will pay monthly rent and that rent can be used to pay off your loan.

That means you can pay off that loan without using any of your own money.

As your loan balance shrinks, your net worth increases. As your net worth increases, you are creating wealth for you and your family.

Along the way, you can reap the benefits of monthly cash flow and appreciation. That means your net worth increases even more.

That’s a powerful combination to generate long-term wealth.

If this concept sounds like something you may be interested in, read on.

Before we talk more about debt pay-down, let’s review two of the other main reasons I invest in real estate.

1. Rental property cash flow is king.

With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses.

For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

Photo by Frames For Your Heart on Unsplash

If your present day expenses are already covered, you can use your cash flow to fund additional investments.

That might mean buying another rental property or investing in another asset class, like stocks.

2. Long-term wealth through appreciation.

Appreciation simply refers to the gradual increase in a property’s value over time.

While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

With rental properties, other people pay off my debt.

When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

However, I do not pay that debt back with my own money.

Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

I then use those rent payments to pay back the loan.

Each time I make a mortgage payment, part of the payment goes to interest on the loan and part of the payment goes toward the principal. This concept is known as amortization.

By the way, this is how real estate investors use Good Debt, also know as leverage, to generate wealth.

You may be totally against debt of all kind. That’s OK. Debt certainly carries risk. I’m not here to convince you that debt is a good thing or a bad thing. I’m just showing you how it works.

For more on the difference between good debt and bad debt, check out my post here.

What is loan amortization?

Amortization is the process of paying back a loan over time in predetermined installments. While your payment amount remains the same, the composition of that payment changes over time.

In the early years of paying off a mortgage, the vast majority of your payment goes to the interest. With each additional payment, more of the money goes towards the principal.

When you take out a mortgage, your lender will give you an amortization table that shows you exactly how much of your monthly payment goes towards interest and principal for the duration of the loan.

For example, if you take out a 30-year mortgage, you’ll receive a chart that shows 360 payments (12 monthly payments for 30 years). You can then look at any month in that 30-year period to see how much of your payment goes to interest vs. principal in that month.

Photo by Naomi Hébert on Unsplash

If you’re so inclined, you can also use an online calculator, like this one at calculator.net, to create an amortization chart for any loan you have.

I’ll admit, looking at the amortization chart is the least fun part of any real estate closing.

Seeing debt payments as far out as 30 years is a bit scary. It’s hard not to think of all the things that can go wrong during such a long time period. That’s why I prefer to think of amortization in general terms instead of specifics.

Generally speaking, I know that some of my monthly payment goes to interest and some goes to principal. The longer I pay back the loan, the more of my payment goes to principal. That’s good enough for me.

With a fixed-rate loan, your monthly payment remains the same.

When you have a fixed-rate mortgage, your payment remains the same for the duration of the loan.

At the same time, because of inflation, rents tend to go up over the long run. Rents may also go up if market conditions improve or if you have forced appreciation through enhancements to your property.

When your rental income goes up, and your debt obligation remains constant, that means more cash flow for you.

For example, say your monthly mortgage payment is $2,500 each month for the next 30 years. And, let’s say you currently earn $3,000 in monthly rent payments.

Over time, your rental income should gradually increase. Some years in the future, you may be earning $4,000 or $5,000 per month in rental income. All the while, your monthly mortgage payment remains $2,500.

You can use that extra income, after covering all other expenses, to pay for your immediate life expenses, pay off your loan faster, or invest in other assets.

It’s for these reasons that having a fixed debt payment over a long time horizon is one of the biggest advantages to investing in real estate.

Think of it this way. Just like with your personal Budget After Thinking, you can make significant strides towards financial freedom when your income increases and your expenses remain fixed.

What do you think of investing in real estate so other people can pay off your debt?

Now, you know three of my main reasons for investing in real estate: cash flow, appreciation, and debt pay-down.

Regarding debt pay-down, each month my tenants pay rent, I can use that income to shrink my loan balance.

As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

When my equity in a property increases, my net worth increases.

So, on top of monthly cash flow and appreciation, debt pay-down is another way to generate wealth through real estate over the long run.

That’s three ways to make money off of a single investment.

Not bad, huh?

If you’re a real estate investor, let us know how you’ve used debt to increase your net worth.

June 22, 2025
Invest in Real Estate Because Cash Flow is King

You may be wondering whether it’s better to invest in real estate or the stock market.

It’s a valid question. We all have limited dollars (some more than others) and need to decide what to do with those dollars.

The debate between investing in real estate or stocks is a good one. There’s no doubt that both asset classes can provide significant long-term growth.

There are also advantages and disadvantages to both types of investments. Advocates on either side of the debate can be very passionate about their preferred asset class.

I personally invest in both asset classes. I have 10 rental apartments in Chicago and a rental ski condo in Colorado. In addition, I invest in the stock market primarily through index funds.

Both asset classes play a key role in my journey to financial freedom. From my perspective, you don’t have to choose one asset class over the other. You can invest in real estate and own stocks.

We’ve spent a lot of time in the blog already talking about the significant long-term upside of investing in the stock market. If you need a refresher, check out my post on investing early and often to benefit from the magic of compound interest.

Today, I want to discuss one of the main reasons to invest in real estate. The reason comes down to a simple term:

Cash flow.

When investing in real estate, cash flow is the money left over each month after paying all your bills.

There’s an old saying, “Cash is king.”

For me, “Cash flow is king.”

My goal is to use real estate to accelerate my journey to financial freedom. To that end, I invest in real estate primarily for the cash flow.

Let’s dive in.

Stocks and real estate will each provide incredible long-term benefit.

Both stocks and real estate can provide significant long-term upside. Besides that upside, I invest in real estate for the immediate benefits of cash flow.

In terms of your Budget After Thinking, your Later Money is for future expenses. Your Now Money and Life Money are considered immediate life expenses.

Let’s talk about the Later Money category for just a moment. We can hopefully agree that both the stock market and real estate investments can generate incredible long-term wealth.

The S&P 500 has historically provided an average annual return of 10%. While not guaranteed to continue in the future, 10% average annual returns represents a powerful wealth generator.

With real estate, the long-term prospects can be harder to sum up with one simple number. There are a lot of variables at play, not least of which are the type of real estate and the geographic market.

For example, I primarily invest in small multi-family properties in Chicago. According to Redfin, residential home prices in Chicago were up 9.1% compared to last year.

Certain neighborhoods in Chicago have fared even better. In the neighborhood I invest in, prices are up 11.1% since last year.

Those are nice short-term trends.

On the other hand, in the past 25 years, home prices in Chicago have only doubled, which actually lags the national average. That’s not so nice.

By the way, you can find data like this for most markets across the country so you can do your own homework on your market.

So, what’s the takeaway?

For me, it’s quite simple:

If you hold real estate for long enough (think decades, not years), it will go up in value.

Given enough time, like the stock market, real estate always goes up.

How much your real estate will increase in value is hard to predict.

My expected long-term returns in Chicago are different from somebody who invests in condos in San Francisco. Likewise, my Chicago rentals are different from my Colorado rental ski condo.

I don’t expect my Chicago properties to increase in value at a rate of 10% over the long-term. I certainly hope the value of my properties beat the historical average in Chicago, but I’m not expecting that either.

The point is, whatever happens long-term, I’m OK with it. The reason I invest in Chicago rental properties is not really about the long-term upside.

It’s about the cash flow.

For me, cash flow is king.

Cash flow is king because it can cover present day expenses.

To be truly financially free, you need to cover immediate life expenses at the same time you are saving for future life expenses.

My definition of being financially free means not being dependent on the income from a primary job to cover your life expenses.

My goal is to be truly financially free. That means I need money to pay for my life now, not just decades from now.

Photo by Bisakha Datta on Unsplash

We just talked about how the stock market and real estate can both help with the future life expenses.

For me, the primary benefit of investing in real estate is to help with those present day, immediate expenses.

In terms of your Budget After Thinking, that means helping with your Now Money and Life Money.

This is where cash flow comes in.

I can use the cash flow from my rental properties to help cover my present day expenses. By having cash flow available in this way, I have accelerated my journey to financial freedom.

In fact, I’ve been hard-pressed to find any other asset class that provides as many benefits in the here-and-now, while also providing benefits in the future.

Let’s explore that point next.

I prefer cash flow from real estate over stock dividends for my current expenses.

Don’t get me wrong, you can certainly reach financial freedom by investing in the stock market. As we just talked about, the stock market provides significant long-term upside.

Plus, you can certainly cover your current expenses with dividends from your stock investments.

However, I think cash flow from real estate is a better option.

Here’s why.

In order to fund your current life with your stock investments, you either need to withdraw some of your earnings or even sell some of your stocks.

When your stock portfolio is growing, you can leave your principle untouched and live off of the earnings. That’s pretty nice.

But, what happens when the market drops? You still have bills to pay and a life to fund. To cover those expenses, you may need to sell some of your stock assets.

Selling assets is not a great way to sustain long-term wealth.

With real estate, you can live off of the cash flow without having to sell the asset.

While your property may go through periods where it decreases in value, if you keep it long-term, the asset will increase in value. During that time frame, you can use the cash flow to fund your life.

Let’s explore this concept a bit further with an example using the popular 4% Rule.

What’s better for monthly expenses: cash flow from real estate or dividends from stocks?

Let’s say you just received a windfall of $250,000. Pretend it’s a bonus from work or an inheritance from a distant relative.

Your goal is to achieve financial freedom as soon as possible so you are not dependent on your W-2 job.

You are considering two investment options.

Option 1: You invest the $250,000 into a total stock market index fund, such as Vanguard’s popular offering (VTSAX).

You’ve done your homework and know that based on the 4% Rule, you can safely withdraw 4% of your money in the first year and then 4% plus an adjustment for inflation in subsequent years. If you do so, your money should last 30 years.

That means you can safely withdraw $10,000 in the first year year, and a bit more each year after that. For simplicity, let’s just look at the first year when you can safely withdraw $833.33 per month ($10,000 / 12 months = $833.33).

Remember, your goal is to leave your primary job. With this investment, you can assume you’ll have $833.33 per month available to cover your monthly expenses. Not too bad.

One important note: the 4% rule contemplates that your original investment should fund your lifestyle for 30 years. Importantly, there’s a chance your portfolio may be completely depleted after 30 years.

There’s also a chance your portfolio may be worth more in 30 years than when you started withdrawing.

Your results in large part depend on the percentage of stocks you own in your portfolio. If you are interested, you can read more about the 4% Rule and successful withdrawal rates here.

One of keys to remember is that while the market does not always go up every year, you will still be making withdrawals every year.

There may be a year where the market drops by 5% on top of the withdrawals you made that year. When that happens, your account balance drops. If you are not flexible in your withdrawal rate, this could lead to problems.

True, when the market goes up, your account balance goes up. The 4% Rule attempts to factors in these up-and-down cycles over a 30 year period.

However, when you are making constant withdrawals over a long enough period, there’s a chance that your account balance will eventually drop to zero.

Keep this in mind as we consider our next option.

Option 2: You use the $250,000 for a down payment on a rental property valued at $1 million.

We will soon learn how to evaluate rental properties. Countless books have been written on the broad topic, and it’s beyond the scope of this post.

Humor me for now since this is only a hypothetical scenario.

Without getting into specifics, I am willing to bet that any decent real estate investor could generate more than $833.33 per month from a $1 million property.

Personally, if I had $250,000 to invest in Chicago, I would not settle for anything less than $2,000 per month in cash flow. And, that would be the bare minimum for me to even tour a property.

With an initial investment of $250,000, my focus would be on finding a rental property with at least $3,000 in monthly cash flow.

For now, you’ll just have to trust that cash flow like that is possible with rental properties. I’ll soon show you how to do the analysis and manage your properties to target returns like this.

Photo by Megan Watson on Unsplash

To recap, with the same $250,000 investment, you should be able to earn more monthly cash flow in real estate than dividends from stocks.

It gets even better.

If you hold your property long-term, your monthly cash flow should increase over time. Over those 30 years, inflation will naturally cause your rental income to increase.

At the same time, if you have a fixed rate mortgage for 30 years, that major expense stays constant. The difference between your increased rental income and constant mortgage payment results in more cash flow.

So, if you are hoping to sustain financial freedom without a primary job, which investment gets you closer to covering your monthly expenses?

Investing in real estate offers so much more than just cash flow.

Don’t stop reading yet.

On top of the monthly cash flow, real estate provides so much more.

Here’s a sneak peak continuing our prior example:

After 30 years, you will own an asset without any debt. In our example, even without any appreciation, you would own a $1 million property debt-free. And, that debt was paid off entirely by your tenants.

Add in appreciation, another major reason to invest in real estate, and your property will likely be worth $2-$3 million debt-free after 30 years.

Compare that to the example with stocks using the 4% Rule. After 30 years of depleting your investment account, your investments may be gone.

To put a bow on this point:

With stocks, you can earn $833 in monthly dividends and possibly have no money left after 30 years.

With real estate, you should reasonably earn $2,000-$3,000 per month (improving over time), and after 30 years will own an asset worth $2 million-$3 million, debt free.

When you look at it this way, the choice is really not that hard, is it?

On your journey to financial freedom, are you convinced that cash flow is king?

I’m not saying it’s bad to invest in stocks or you should only invest in real estate. I personally invest in stocks and real estate.

I see a place for both asset classes in my future.

If you haven’t previously considered investing in real estate, maybe you’ll now think about how that monthly cash flow can fit into your overall investment portfolio.

If you’re striving for financial freedom, are you convinced that rental property cash flow can accelerate your journey?

Let us know in the comments below.

June 12, 2025
Happy that I Delayed Financial Independence
I’m further away from financial independence today than I was five years ago.

You know what’s funny?

I couldn’t be happier about where I am today.

Let me explain.

In 2020, my wife and I had very minimal expenses.

At the start of 2020, my wife and I were both working as lawyers in Chicago. We lived in an apartment in a 4-flat that we had purchased in 2018. We had no kids at the start of the year, but were about to welcome our first.

This was a good apartment in a popular part of town. It had 3 bedrooms and 2.5 bathrooms. That was plenty of space for my wife and I, and eventually the two babies we brought home there.

We purchased this 4-flat from a real estate investor who had done a decent job on the renovation. It had in-unit washer/dryer, modern finishes, and plenty of storage.

We had a small outdoor patio with enough room for a grill and little table. We also had a garage parking space but ended up parking our 20-year-old car on the street most days.

When we purchased the building, it was the most expensive 4-flat that had ever been sold in that part of town. It was a bit of a risk to set the high-water mark in the area.

In the end, the risk was more than worth it.

Even though the building was expensive for the area, this was not a fancy apartment. This part of town was still up-and-coming. Some people probably thought it was not a nice part of town.

I doubt many people came over and thought, “Wow, look at this amazing apartment!”

The more likely reaction was probably something like, “What the heck are they doing?”

To be fair, I asked myself that question plenty of times.

So, what were we doing?

We were paying ourselves to live there.

Say that again?

My wife and I paid ourselves to live in that apartment.

We lived for free. And made a profit at the same time.

See, the rental income from the other three units covered the entire mortgage plus all expenses for the property.

But, that’s not all. On top of covering all the expenses, the rental units generated a profit of $1,000 per month on average.

So, not only did we spend zero dollars each month on housing, we profited $1,000 per month.

Looking back, getting paid to live in a decent apartment was maybe the best decision we ever made.

What happens to your finances when you live for free?

Let’s take a look at how living for free can be a major advantage on your way to financial freedom.

The common wisdom is for people to spend no more than 30% of their gross income on housing. Regardless of how much you make, that usually means thousands of dollars.

Because our tenants were paying our living expenses for us, we did not have that expense for the five years we lived in that apartment.

In other words, we didn’t have to worry about budgeting for housing.

We also drove a nearly 20-year-old car and could walk to the “L” (Chicago’s subway). We lived in a neighborhood with plenty of nearby restaurants and shops. That meant our transportation costs were next to nothing.

Because we weren’t paying for housing and had very minimal transportation costs, we could supercharge our savings.

How much were we able to save?

Let’s take a look.

Between 2018 and 2023, my wife and I acquired three buildings and ten apartments in that same neighborhood. We’re very familiar with market rents in the area.

We rent our apartments for anywhere from $2,300 to $3,600 per month. Our usual tenants are professionals like engineers, lawyers, doctors, consultants, and pilots.

The unit we were living in from 2018 to 2022 was one of our larger units. At the time, it would have rented for $3,500 per month on average. That equals $42,000 per year to rent that apartment.

Keep in mind, if someone was paying rent to live there, that would be $42,000 of after-tax money.

Since we owned the building, we lived there for free. We could save that $42,000 we would have otherwise paid in rent. Instead of spending that savings on things we didn’t need, we were able to save that money for our next real estate investment.

Plus, we earned $1,000 on average per month while we lived there. That’s an additional $12,000 per year in profit.

We lived in that unit for almost five years.

Add it all up and we saved $270,000 by living in that apartment for five years.
- $42,000 saved rent x 5 years =$210,000.
- $12,000 profits x 5 years = $60,000.
- Total savings = $270,000
We used that $270,000 for a downpayment on a rental condo in Colorado ski country.

It took five years of living in a decent, but not-awesome, apartment to have a ski condo that will hopefully be in our family for decades.

Choosing to live in our 4-flat to save $270,000 over five years was one of the best financial decisions we’ve ever made.

Photo by Alain Wong on Unsplash

I highly recommend you consider house hacking if you’d like to start investing in real estate.

Many of you are familiar with the strategy of living in a building (or home) you own while tenants (or roommates) pay for it. Brandon Turner, of BiggerPockets fame, popularized the concept he dubbed “House Hacking”.

You can read all about house hacking on BiggerPockets here.

For even more information on house hacking, Craig Curelop wrote a book for BiggerPockets called The House Hacking Strategy: How to Use Your Home to Achieve Financial Freedom.

Without a doubt, there is no better strategy for entry level real estate investors than house hacking. I gave you a glimpse of the financial upside earlier in this post.

Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.

The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”

Ignore them.

My wife and I lived with our tenants for five years at this property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids.

Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.

Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.

So, why am I further away from financial independence today?

I’m further away from financial independence today because my expenses have gone up since 2020. I’ve already alluded to those increased expenses throughout the post.

In 2020, we had our first child. Now, we have three children.

Also, after seven years of house hacking, we decided it was time to purchase a long-term home for our growing family just outside the city in a terrific area.

We also finally traded in our 21-year-old car for our first new car ever.

How’s this for easy math:

Three Children + Nice House + New Car = Further Away from Financial Independence

While that combination means I’m further away from reaching financial independence, I now have everything that I could possibly ever want.

That’s why I couldn’t be happier with where I’m at today.

My end game is finally in sight. Five years ago, I didn’t know where I’d be living or what car I’d be driving or what my family situation might be.

Now, the picture is clear.

I can calculate with reasonable certainty how much money I need to be truly financially independent. I can use that number as a target and make every financial decision with that target in mind.

That’s why in 2025, I’m focused on paying down HELOC debt. Each time I make a debt payment, I move closer to financial independence.

Besides, my goal is FIPE not FIRE.

My goal is to reach FIPE not FIRE.

FIPE means Financial Independence, Pivot Early.

I have no intentions of retiring any time soon. Retiring early is not, and has never been, my goal.

My goal is to become financially independent to create as many options as possible to protect myself and my family. I want to be financially independent so I can pivot no matter what life throws at me.

If my goal was to retire early, I may have skipped the single family home in a great neighborhood. I could have continued house hacking, minimized my expenses, and lived off of the rest of the rental income.

But, I want more for me and my family. I don’t want to just survive.

Have you delayed financial independence to craft the life you really want?

My life has certainly changed in the past five years, but all that change has been for the better.

That meant house hacking at first to keep expenses as low as possible. Now it means enjoying the wealth I created by making those earlier sacrifices.

In order to have the life I want, I needed to temporarily move further away from financial independence.

Still, I’m confident that I’ve taken the right steps to not just reach financial independence, but to reach it while living the life I want.

The tradeoff is that it will take me longer to be truly financially independent. I’m perfectly happy with that.

Financial independence has never been more clearly in sight. It’s just delayed a little bit.
- Is your goal to reach FIPE and pivot as quickly as possible?
- Or, are you OK with delaying FIPE temporarily for the life you truly want?
Let us know in the comments below.
April 18, 2025
How to Use HELOC to Buy Investment Property
Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.

The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.

Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.

Read on to learn what a HELOC is and how to use a HELOC to buy investment property.

What is a HELOC?

A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.

Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.

Just like with a primary mortgage, when you open a HELOC, the bank is protected by the equity in your home.

Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.

Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.

This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.

That opportunity might be using your HELOC to buy investment property.

Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.

Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.

To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.

You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.

What to know about paying off a HELOC.

If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.

HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”

The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.

During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.

These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.

At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.

The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.

Four advantages to using a HELOC to buy investment property.

Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.

1. You can use a HELOC as you would use cash, including for a downpayment.

Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.

With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.

This is a huge advantage if you want to use a HELOC to buy investment property.

That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.

On the other hand, cash advances from credit cards are typically not allowed for a downpayment on a conventional loans.

2. HELOCs charge lower interest rates.

The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.

Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.

According to Bankrate, here are the current average interest rates:
- HELOC: 8.04%.
- Credit card: 20.09%.
- Personal loan: 12.37%.
As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.

It’s also the primary reason why I have used a HELOC to buy investment property.

Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.

In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.

From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.

3. You only pay interest on HELOCs during the draw period.

As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.

Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.

This is also another key reason why a real estate investor would use a HELOC to buy investment property.

Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.

4. You may have access to a larger sum with a HELOC.

Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.

While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.

A larger available balance comes in handy when you want to use a HELOC to buy investment property.

For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.

The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.

If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.

How I’ve used HELOCs to scale my real estate portfolio.

Using HELOCs can be an effective way to scale your real estate portfolio.

As mentioned above, you can use your HELOC for a downpayment on another investment property.

This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.

Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.

We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.

After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.

We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.

As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.

Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.

Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.

Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.

We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.

We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.

Don’t ignore the biggest risk of using a HELOC to buy investment property.

With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.

HELOC equals debt.

Like with all debt, if you abuse the privilege, you are going to get yourself in trouble.

This is why Dave Ramsay is adamant that debt should not be used as a tool to build wealth.

In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.

If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.

That’s a huge risk.

Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.

I would not use a HELOC as a beginner investor.

While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.

I say that for good reason.

When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.

I’ve experienced these negative emotions associated with debt. I only got comfortable with taking on debt as I learned to trust myself again with the responsibility.

While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.

If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.

By responsible with debt, I mean:
- You pay your credit card, and all other bills, in full every month.
- You’ve never missed a payment.
- You’ve proven you can control your spending.
- You fuel your Later Money every month.
- You understand the risk of taking on additional debt.
- You’ve thought and talked about it with your inner circle.
If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.

How do you apply for a HELOC?

Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.

If you’ve ever applied for a mortgage, you know this is not a fun process.

The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.

Let’s look at an example of using a HELOC to buy investment property.

Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.

For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.

In this example, let’s say you bought a home five years ago for $500,000.
- You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
- For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
- Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.
Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.

This is because you have paid the mortgage down every month and your home has appreciated in value.

In this scenario, you may be eligible for a HELOC to buy an investment property.

How do lenders calculate the amount of your HELOC?

Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.

What is Loan-to-value ratio?

Loan-to-value ratio is a complicated name for an easy math formula:

LTVratio = Mortgage amount / Property value.

In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.

So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.

A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.

That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.

The bank does this to protect itself by requiring you to maintain 30% equity in your home.

To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:
- Value of home = $600,000.
- First mortgage = $350,000 (approx. 58%)
- HELOC = $70,000 (approx. 12% of value of home)
- Combined mortgage + HELOC= $420,000 (70% of home’s value).
- Remaining equity in home = $180,000 (30% of home’s value).
Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.

Have you used a HELOC to buy investment property?

Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.

Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.
- Have you used a HELOC to buy investment property before?
- What about using a HELOC for any other purpose?
Tell us about your experience in the comments below.
March 19, 2025