Investing

Hybrid Real Estate / Investing Idea

  • Last Updated:
  • Jun 7th, 2021 9:54 pm
[OP]
Deal Addict
Nov 9, 2013
4065 posts
3928 upvotes
Edmonton, AB

Hybrid Real Estate / Investing Idea

1) Buy rental properties with 20% down
2) Get HELOC
3) Draw from HELOC as rent payments go towards equity in home
4) Invest HELOC draw into stock market
4a) could use dividends to create cash flow to live off of, or growth stocks to drive asset appreciation

Or you could use renter's equity to buy more rental properties, giving you more cash flow to invest.

It's basically the Smith Maneuver, but using rental properties (and other people building you home equity) instead of just using your own home.

It would probably be highly tax efficient, and it's an easy way to get access to cheap leverage as well as permanent capital backed by your HELOC. It would all fall down if you had a cash flow crunch and couldn't service your debt however (i.e. economy implodes, job losses mount, renters leave, forced equity / real estate seller at the bottom).

Thoughts? Am I crazy?
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8 replies
Member
Dec 8, 2020
270 posts
269 upvotes
Toronto
lets take a $500,000 property with $100,000 down, where did you get the $100,000?

since you have an 80% mortgage on it, is it possible to get an HELOC on that property?

will the rental income cover all property related expenses, especially if its a condo
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[OP]
Deal Addict
Nov 9, 2013
4065 posts
3928 upvotes
Edmonton, AB
Here in Edmonton I do have an townhome rental, 80% LTV, that's cash flow positive (rent > mortgage + insurance + condo fees + maintenance expense).

It's a relatively new purchase, so the vast majority of the mortgage payment is going to interest, but as time goes on I'll build more equity in the home that I could then (in theory) draw on a HELOC to invest. Obviously at 80% LTV I can't do this yet, but after years of holding I can. I plan to get a few other rentals down the line as well and I will only do it if it's cash flow positive.

For the purposes of the discussion you can assume the real estate investments would be cash flow positive.
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Member
Dec 8, 2020
270 posts
269 upvotes
Toronto
what if you could buy an RE investment 100%, then HELOC it at 65%, use the 65% money to buy another RE, on the second one take out as much HELOC as possible.

the other option seeing mtge rates are super low it might be better with a paid off property to mtge it max you can get at 1.6%. Use that money to buy a second then subsequent third & more properties.
Learn something new daily, question everything, avoid answering questions.
Deal Fanatic
Apr 25, 2006
6509 posts
1407 upvotes
Not a new strategy.

Most front office people at the banks, take out HELOCS and buy dividend safe stocks, ie. banks.
"If you make a mistake but then change your ways, it is like never having made a mistake at all" - Confucius
[OP]
Deal Addict
Nov 9, 2013
4065 posts
3928 upvotes
Edmonton, AB
Janus2faced wrote: what if you could buy an RE investment 100%, then HELOC it at 65%, use the 65% money to buy another RE, on the second one take out as much HELOC as possible.

the other option seeing mtge rates are super low it might be better with a paid off property to mtge it max you can get at 1.6%. Use that money to buy a second then subsequent third & more properties.
Agree re utilizing low interest rates - the idea is basically to get a permanent source of capital, leveraged at a low rate, to invest into other assets.

The stocks vs real estate decision (ie use HELOC money to buy equities vs buying another rental) would boil down to a capital allocation decision - ie what will give the best risk adjusted return moving forward. I would lean towards equities doing this rather than real estate, but in an exceptionally weak market I could pivot and buy another rental.

If I do go the equity route, I would put half the money into income producing stocks (ie dividend stocks) and half into a broad based Corp class etf, which i could then sell a portion of in the future if I ever wanted to get cash for a down payment or for other reasons (while continuing to hold the income producing assets).

Alternatively, I could always just turn off the Investment draw HELOC tap if I wanted to pool equity for a future down payment. On top of this the rental would be cash flow positive, so even if I just do nothing cash and equity would accumulate with time.

I would view the rental real estate component as just a means to use other people’s money to invest (renters) while also giving access to cheap leverage (via HELOC).

I think I understand your reasoning for buying first property 100% (allows me to scale assets faster) but I would rather go slower and use other peoples money and leverage to get assets up over time.

This would also give me a bit more liquidity (ie don’t have 45% equity illiquid in a property).
Last edited by treva84 on Jun 6th, 2021 11:41 am, edited 2 times in total.
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[OP]
Deal Addict
Nov 9, 2013
4065 posts
3928 upvotes
Edmonton, AB
1xTiMeR wrote: Not a new strategy.

Most front office people at the banks, take out HELOCS and buy dividend safe stocks, ie. banks.
I know the Smith Maneuver isn’t new; I’ve just never read about people doing it with rentals.
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Member
Apr 8, 2017
283 posts
125 upvotes
Using HELOC as a downpayment on another property is something people have been doing for years, so its not a unique strategy. I know some lenders stopped accepting HELOC as source of downpayment but it can still be done, make sure you speak with your bank/broker about the options.

I would not call it SM for rental properties though since you have to wait till you pool enough money for a downpayment. As you mentioned its capital allocation decision and only you can make this decision based on goals.

If you want to leave it for luck to decide, start implementing SM and when you have enough in your SM portfolio you can choose to sell to have a downpayment. Of course i'd only do it if this equation is satisfied:
(Portfolio size - cap gain taxes) >> HELOC balance

This strategy will either help you get a DP quicker if your equities do good, or postpone your decision if we hit a correction
[OP]
Deal Addict
Nov 9, 2013
4065 posts
3928 upvotes
Edmonton, AB
ShuttleBoy wrote: Using HELOC as a downpayment on another property is something people have been doing for years, so its not a unique strategy. I know some lenders stopped accepting HELOC as source of downpayment but it can still be done, make sure you speak with your bank/broker about the options.

I would not call it SM for rental properties though since you have to wait till you pool enough money for a downpayment. As you mentioned its capital allocation decision and only you can make this decision based on goals.

If you want to leave it for luck to decide, start implementing SM and when you have enough in your SM portfolio you can choose to sell to have a downpayment. Of course i'd only do it if this equation is satisfied:
(Portfolio size - cap gain taxes) >> HELOC balance

This strategy will either help you get a DP quicker if your equities do good, or postpone your decision if we hit a correction
Yes, it seems with 20% down I have to wait 5 years or so before I can really start ramping this up.

I think it's an interesting idea, but nothing I can execute on now.
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