Do This Instead Of Borrowing Against A F...

So, I get lots of questions about funding. But someone asked me a question recently that actually doesn’t get discussed so often, and I think it’ll make a great lesson.

Hey Moguls, Patrick Riddle here to help you figure out whether it’s a good idea or not to borrow against a property that’s owned free and clear. The reason someone would ask this is because they’re thinking this might be a good avenue to access cash for funding their real estate investing deals.

So, I’ve given this idea some thought, as has my good buddy and fellow investor, JP Moses. Here’s what we’ve come up with…

First of all, if you’ve got a property that’s free and clear, you’re in a great position! Not many people have that. It gives you potential leverage to bring in money.

But my question is this: What specifically would you be borrowing capital for? If it’s for additional deals that you’re doing, I would suggest keeping the free and clear property just as it is – free and clear.

Seek out Other Sources

There’re definitely a lot of resources out there for us investors to raise capital in order to fund our deals. That might be through private lenders… or even hard money lenders – although it’s a little more costly – hard money lenders are an available funding resource for your fix & flip wholesale deals.

I would challenge you, based on what you’re planning to do and your business model, to look for other ways to bring in capital for the types of deals that you want. Then protect and maintain your free-and-clear property, because that’s an awesome asset to have. No matter what the market does, whether it goes up or down, you’ve got that asset in hand.

See, going the no-debt route is huge! Even though we’re talking about private money lenders and such, I’m always looking for a way to avoid bringing more debt into the equation.

Consider a HELOC

I know that JP is willing to do short-term, laser-focused debt, but not long-term debt...

For this reason, he recoils at the idea of borrowing against a free-and-clear property.

So, what you might consider doing is to get a HELOC (home equity line of credit) against that property. That means that if you don't use that line of credit, you'll never be charged for it. It's not a loan, but rather, it's available credit against the property.

Here's how a HELOC can be awesomely helpful:

A. It can be used as your source for earnest money or down payment money.

B. It could It could be an easy proof of funds when you need to show that you have this much money available.

C. It could be your backup source of funding if your primary source of funding can’t move fast enough. Better to be a backup plan than to use as the primary source.

Look, in all my years of working with real estate investors, I’ve never heard of one going under who was totally debt-free. The ones who lose their shirts are the ones who - when things get rocky - still have all that debt staring them in the face.

So, I’m not saying this is a bad idea particularly, but we strongly encourage you to proceed with great caution and check out your other options.