Income stream diversity is one of the keys to building wealth.
Did you know that millionaires never have only one source of income? They build diverse portfolios. Business income, stocks, and investments – when managed properly – are all good ways to grow wealth. And you know what else can make a strong income stream? That’s right. Rental property.
But it can be hard to grow your property portfolio using traditional mortgages. For each property you purchase on a mortgage, your debt grows – and your cash flow doesn’t grow by much. However, using a HELOC to buy investment property may give you the jump start you need.
Consider what might happen if you use a home equity line of credit to buy rental properties. Let’s say you’ve already paid off your primary residence (maybe even using a HELOC). Now you have access to all your equity. So, you take out a HELOC for 95% of your home’s value. That’s assuming a good credit score and low debt-to-income ratio, among other positive factors.
Let’s say that amount totals $275,000. So, you buy 2 rental properties. They’re located well, so you get $3,000 in rental income per month. That’s positive cash flow.
Here’s how the numbers might work out.
Rental Income + Positive Cash from Income = Total Positive Cash Flow
Primary Job Monthly Income: $5,000
Monthly Bills & Expenses: –$2,000
Monthly Positive Cash Flow: $3,000
Monthly Rental Income: $3,000
Monthly Income Available to Pay Down the HELOC: $6,000
$275,000 HELOC / $6,000 per month = 3 years and 10 months to pay down the HELOC.
Yes. There’s a key part of the equation missing: interest. Of course, you’ll have interest to pay. But look at how quickly you could pay down the principal balance. Even if you double that amount of time it would take, you’re still going to own 3 properties outright in under 8 years. And your monthly positive cash flow at that point could be $5,000.
But you don’t just sit on that income.
Instead, you turn around and buy 4 more properties, following the same principle of using all your positive cash to pay down the HELOC. If you stick to your plan, you could own 7 properties outright in around 15 years.
Your residual income each month could be $11,000.
And you will have built that income in around the same amount of time it would take to pay off a 15-year mortgage on one single house.
Combining your investment property income with your own positive cash flow can give you the ability to pay down your HELOC much faster. It helps you create a second income stream. And it can be the beginning of your family’s generational success.