Tappable Equity: Usable Home Equity Has Exploded Higher

Tappable equity is the amount of home equity available for homeowners to withdraw via a cash-out refinance or a second mortgage. It is typically calculated as total home equity minus 20 percent of home value. The 20 percent figure is used as a collateral cushion to protect the lender. 

Tappable equity is a new term that I've been hearing more often nowadays given the changing of the current housing market. Most homeowners like to guess how much their homes are valued. They look at online pricing estimates and get all pumped about what a neighborhood home sold for.

Despite the excitement generated by changing home prices, it's really the home equity that counts the most.

Home equity is equal to the current estimated value of a house minus the mortgage. For more precision, you could calculate home equity by also subtracting the estimated selling costs, including commissions, taxes, and fees from the market value of your home.

Example Of Tappable Equity

Let's say you own a $1 million home. If you have $400,000 in equity (60% LTV with a $600,000 mortgage), then your tappable equity is $200,000. $200,000 comes from $400,000 (home equity) – $200,000 (20% equity in your home).

With the $200,000 in tappable equity, you can take out a home equity line of credit (HELOC) or do a cash-out refinance to remodel, pay for your kid's college tuition, or buy the latest Ferrari Spyder. Even if you blow all your tappable equity, you still have $200,000 left of home equity.

Here's another example of tappable equity.

Let's say you bought a home for $500,000 in 2019 with 20% down ($100,000 home equity, $400,000 mortgage, 80% LTV). Today, the home is worth $700,000 and $360,000 is left on your mortgage.

You now have $340,000 in home equity ($700,000 – $360,000) and $200,000 in tappable equity. The $200,000 comes from subtracting $140,000 (20% equity in a $700,000 home) from $340,000 (home equity).

Now that you see this dynamic example of how tappable equity can grow, you might be wondering whether the 20 percent equity variable should be applied to the original purchase price or current market value of your home.

You can do either for your personal calculations. But if you want money from the bank, you will have to use the current market value of your home.

From the bank's perspective, it wants to have a large enough equity buffer just in case the homeowner is unable to pay back its loan. Back during the global financial crisis, many lenders shut down HELOCs to protect their balance sheets.

In reality, the value of your home, home equity, and tappable equity are subjective. There's probably up to a 15% +/- valuation difference to consider.

Huge Increase In Total Home Equity Since 2010

Tappable equity has increased dramatically with the total amount of equity that has grown since the global financial crisis. But since 2020, the growth in total home equity has grown even steeper. Here's a great graph by The New York Times and The Federal Reserve.

Total home equity in owner-occupied housing over time in America, as a result, tappable equity has also increased

The massive growth in tappable equity is one of the main reasons why Americans and homeowners all over the world are feeling richer. Roughly 67% of Americans own homes.

The long-term growth trend of real estate is another reason why I recommend all readers invest in real estate. If you can't buy a primary residence yet, invest in real estate online through quality platforms such as Fundrise.

Fundrise manages over $3.5 billion for 400,000 of its investors. The firm primarily invests in residential and industrial real estate in the Sunbelt region, where valuations are lower and yields are higher.

I've personally invested $810,000 in private real estate since 2016 to diversify and earn more passive income.

Sign up for Fundrise

Top 10 Metro Areas With The Most Tappable Equity

Below is data from research house, Black Knight that shows the top 10 metro areas (cities) with the most tappable equity. Number one is San Jose, California, with a whopping $775,000 in tappable equity as of 4Q2021. In 2023, the tappable equity amounts are all higher.

I'm not sure how San Jose tappable equity can be so high since the median home price is about $1,500,000 according to Zillow. This would mean after spending $775,000, the average San Jose homeowner would still have about $300,000 in home equity. If this is the case, the San Jose market will be incredibly resilient to a housing downturn.

The second city with the most tappable equity is actually my home town of San Francisco with $622,000 as of 4Q2021. However, in terms of the change in tappable equity, San Francisco ranks only 4th. The median home price in San Francisco is anywhere between $1,600,000 – $1,900,000 depending on which real estate organization you believe.

So again, another extremely resilient city in case of a downturn. Back in 2008 – 2010, home prices in San Francisco only declined by about 15%. That's not a lot compared to the tremendous rise for years prior.

Top 10 Cities With The Most Tappable Equity

Most Impressive Cities For Tappable Equity Growth

Out of this top 10 list, the most impressive cities with tappable equity are Boise City, Austin, and Sarasota. The reason why is because for all three cities, the percentage change in tappable equity from 4Q2019 to 4Q2021 is over 100%!

The pandemic has supercharged the home equity amounts of practically every city and town in America. As a result, any downturn in the housing market won't be nearly as rough as it was during the global financial crisis.

Please note that after a surge in mortgage rates, prices in cities such as Austin and Boise City are down over 10% in 2H2022. I suspect national median home prices could easily fall by about 5% – 8% in 2023. However, if inflation and mortgage rates come down by 2-3%, as I expect they will, home prices will stabilize once again.

The financial quality of homebuyers since the 2009 crisis has been very high compared to before 2008. Meanwhile, the supply of homes remains stubbornly low, and will likely continue to remain low given the majority of mortgages are 30-year fixed-rate mortgages under 4%.

If you've locked in a low mortgage rate, it's hard to let it go, especially if you have to go and buy a new place with a higher mortgage rate. Instead, the financially savvy homeowner may rather rent out their primary residence and upgrade to a new primary residence if they have enough funds.

Ideas For Spending Your Tappable Equity

I don't recommend using your home as a piggy bank. Leveraging your home equity to buy another home with debt is risky, especially if the new home violates my 30/30/3 rule. However, if you must tap your home equity, then the only thing I can recommend spending money on is home improvement.

After about 20-25 years, home remodels start looking tired. Further, fixtures and appliances begin to wear out. Therefore, you may want to use your tappable equity to upgrade your home.

Using your home equity is like a company using its retained earnings to grow. Do so wisely and the valuation of your home will grow. However, spend too much on remodeling and you may end up losing money.

The easiest home improvement items to spend money on are fixtures and appliances. You'll be amazed how much new faucets, cabinet handles, door handles, refrigerators, washer dryers, and dish-washing machines can improve the look of your house.

Painting the exterior and interior of your house is also a nice use of home tappable equity. So is upgrading your windows and doing some landscaping.

In general, it's always a good idea to keep your funds within the same asset class, e.g. real estate. If you start co-mingling funds too much, you might run afoul of your normal risk parameters.

HELOC For Bridge Loans (Short-Term Loans)

Thanks to Financial Samurai readers sharing their thoughts, I do like the idea of having a home equity line of credit to use for a bridge loan. A bridge loan is just a short-term loan to help get a transaction done.

For example, let's say you need to put down $240,000 to buy a $800,000 investment property. You only have $150,000 in cash and like to keep at least a $50,000 cash reserve. Use $140,000 of your HELOC to add to $100,000 cash for the down payment.

At the same time, you also want to sell another property within three months, which will provide you a $300,000 windfall. When you sell the property, you simply pay back the HELOC. If the interest rate on the HELOC is 4% for the year, then you really only paid about $1,400 in interest if you took three months to pay the HELOC off.

One commenter writes,

We have 6 rentals (owned with a business partner 50/50) in Heartland America (varying from 200k-650k each). The HELOC has been instrumental in getting some deals done, bridging gaps in cash, for both finance and cash deals on investment properties.

My wife and I are DINKS, with annual income combined 450-500k, so cash flow is great as far as paying back HELOC when used for short term periods.

Mortgage service payments are historically low

Make Your Home Equity Untappable

Despite the incredible amount of home equity that has been created since 2010, I would remain disciplined by leaving your home equity alone. Tappable equity can also decline.

It's much cheaper and easier to just use cash flow to fund your spending. If you don't have the cash flow or funds, then save more or work more. However, opening up a HELOC when times are good to use in case of an emergency isn't a bad idea.

As soon as you start tapping your home equity, you might start getting addicted to the source of funds. The same thing goes for borrowing from your 401(k). Don't touch it. Just because you have access to funds doesn't mean you should use it.

Try to keep the home equity growing by consistently paying down your mortgage. Avoid doing a cash-out refinance to buy risk assets like stocks either. By the time you're in your 60s, you'll be glad you continued to pay down your mortgage.

Let me leave you with one last tappable home equity chart. It shows homeowners now have about $20 trillion more home equity in 2022 compared to only $5 trillion in home equity in 2016. Not bad!

Tappable home equity

Invest In Real Estate More Surgically

If you want to invest in real estate today, I suggest being more surgical with where you invest and without as much leverage.

Check out Fundrise, the leading private investment platform. It offers funds primarily invested in single-family and multi-family homes in the Sunbelt. Single-family rental properties are my favorite real estate asset class to take advantage of structural undersupply and positive demographic trends.

Fundrise offers an easy way to gain exposure to real estate with just $10. Fundrise has been around since 2012 and is one of the most consistent performers over the past 10+ years. For most investors, investing in a diversified fund is the way to go.


For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter. Tappable Equity is a FS original post.

40 thoughts on “Tappable Equity: Usable Home Equity Has Exploded Higher”

  1. HELOCs are great but be careful. The additional debt is included on your credit report and could be a deterrent for future real estate purchases by adversely affecting your DTI (e.g. qualifying ratios). Not sure it’s true for all banks but something to watch out for.

  2. What happens when the market corrects and the home prices drop after you took out a HEL/HELOC? Technically, you could be underwater on the property.

    1. You technically could. If things get really bad, the bank could pull your HELOC.

      So some decide to fully utilize the HELOC for something BEFORE the bank pulls it. But those who do use the HELOC in anticipation of big price declines needs to have the cash flow to afford the extra debt payments.

  3. I took one out on a house recently and came across something interesting…

    The banks will supposedly use the current market value of your house *only* if the purchase was over 12 months old. If it’s less than 12 months old, talking 364 dates 23 hours… then they only will use the original purchase price for the HELOC. My property had increased $235k since I bought it and happened to close in January 2021. When I submitted for a Heloc in January 2022, the HELOC offer came back with equity based on the original purchase price and original 20% delta. I had to talk with the loan officer to go into the system and manually calculate the difference. The funny thing was due to the back log of HELOCs, the actual transaction was occurring in March so I had the house for over 2 months longer than 12 month, but because I applied in January they were looking at it being only 12 months. I then had to prove the closing date of the house versus the application date in January was over 12 months, which it was by 21 days. So, in the end because the system goes by Month and Year and not Day, Month and Year, it assumed less than 12 months. Crazy, I would have lost out on an additional $230k equity because of a couple day delta.

    Not sure if this is true with all lenders, but It seemed like it with US Bank, BOFA, NorthEast, US Citizen, and a couple other random credit unions.

    Check your offers to ensure they are not defaulting to the wrong date…

    1. This is a compliance issue for all federally regulated banks. The applicable law is FIRREA. Banks must lend on the lesser of cost or appraisal if purchase was < 12 months prior.

      1. Never knew that. Just read the changes and the adjustments made due to previous issues. So the regulations makes sense, but why default the month year and not enter the date? And why would an application date be the place holder especially if an appraisal is ordered which could come days, weeks or months after? Seems like an arbitrary date to hold and not just to go with the date of final review. Either way worked out for me but definitely stunted my Reno plans for a minute or two.

        1. I’m assuming that your bank just uses month & year to simplify their compliance reporting. Similarly, they just utilize the application date because it’s easy to track. If > 365 days has passed from purchase to effective date of the new appraisal, a good loan officer should be able to step in and utilize the appraisal regardless of application date. The key to your situation is you knew to ask.

    2. Fascinating insight. Interesting on the one year cutoff for valuation. Seems like a good conservative buffer so banks don’t overstretch their loan book. Would think it would be good to do a waterfall instead of a one year cliff for valuation calculation.

      What do you plan to do with your HELOC?

      1. I’m finishing my attic, and basement. New bedroom, bathroom and movie room in attic. New workout room, bar, bathroom and kid play area in the basement. Already under construction and should be done around June 15.

        Figured if we are going to go through the drama of home construction may as well do it all at once.

  4. Wife and I are 58. We paid our home off in 2014. We have now been in the house for 17 years. We have done 1 upgrade project each year and since we are pretty handy have done much of the work ourselves with the exception of new HVAC System, Exterior Painting and this year a new roof and fixing the approach on our driveway damaged by street salt over the last 17 years. Our next big project is our kitchen upgrade … but kinda pushing this off as new appliances are hard to come by or are back ordered for months.

    Since paying off our home, we have taken advantage of a no cost HELOC with our long time Bank. We have renewed it 3 times to take advantage of the increased value of our home. In fact, we used the HELOC appraisals to battle our county’s tax assessment on our home as the counties market value far exceeded our appraised values which helped us justify a lower tax bill. In 2021, we renewed our HELOC at $480K with a 4% rate (obviously going up), with a zero balance. We don’t use it and have it for Emergency Purchases. Although we have a solid cash cushion to help us manage up to 3 years of expenses and many of our home projects I mentioned above…we believe we have a very solid cushion to tap if any emergency arises with the HELOC as the last resort.

    We have kicked around using our HELOC to buy rent to own starter home property for kids as they leave the nest to help them get in the door when this market levels out while “keeping the money in the family” so to speak…however, there may be better options than the HELOC for this. Thoughts?

    1. How would a rent to own work for kids? Love the idea of getting our kids in the market with soaring prices before they can afford it on their own. How would you arrange that?

      1. David, good question. We are still kicking options around and thinking this through a bit. So if you or others have ideas or experience, please share. My daughter and son-in-law are in a house in their names so we are just looking at this for my youngest son right now. We were thinking the following.

        (1) We would purchase the house in our name and rent to my son. Our desire is to get a home that needs work in a good area of town. Has a solid roof, foundation, windows.
        (2) Any upgrades, modifications, remodeling to the house labor will be done by us (family). Putting a hammer in his hands to teach him DIY skills and pride of ownership for the most part …plan, design, budget, build, maintain.
        (3) At some point, he gets financing and purchases house from us.
        (4) If he decides to move elsewhere, no problem, my wife and I could decide to downsize to this home, rent it out, or sell it depending on the market.

        Again, this has been back of envelope thinking. With the market the way it is, starting out with rent or purchasing a house is expensive. He has a college degree w/honors yet starting salaries vs rent/mortgage while saving just are not in the cards right now…heck who knows, this may be the start of many more multi-generational families in a single household as that % seems to be increasing.

        1. I see a couple thoughts that you might want to mull over further. You will know the answer to some of this more than me: Your daughter may be in a better position now, but she still might have feelings that could be hurt by the appearance of you doing more for her brother.

          If housing continues to appreciate (who knows?) he may never reach a position to buy you out.

          When it comes time to buy out, unless you intend to offer him a below market deal and suffer some loss yourself, it can be hard to get a valuation that does not make either the buyer or seller feel that they were the loser.

          I offer you another option to consider: when I bought my first property, my Dad made me a no-interest ‘loan’ towards the down payment. It was worth 13% of the property value at purchase. When I sold the property years later, I returned 13% of the sale price to him. He was willing to risk that the property value and his stake would go up or down.

    2. That’s a nice cushion. I suspect many more real estate buying opportunities over the next 18 months. Cycles are slower in RE.

      Regarding buying a property for your kids to rent and eventually own, I think it’s a great idea. I’ve done just that, but concentrated in San Francisco and they aren’t adults yet.

      Your way is good and the fact that you can be more flexible and where to buy. So if they end up with a good job in Memphis, and they like to stay there for longer than 3 to 5 years, and perhaps buying over there for them to rent and eventually own makes sense.

  5. Ms. Conviviality

    For two of the properties we own in north central Florida, the tappable equity is 96% and 130%. A third property we own is a condo purchased in 2006 and is still underwater due to a loan modification that tacked on $40,000 that is due when the mortgage is satisfied, but at least the gap between the mortgage and market value went from $50K down to $18K. I would love to tap the 96% equity on the investment property to get another property but we need to finish renovating that property first. My husband is a handyman and I’ve tried to keep him focused on working on our property but when there are clients begging for him to work and willing to pay him much more than he used to be making for the same jobs, it’s been difficult to be get the property ready for rental so that we can move onto the next one.

      1. Ms. Conviviality

        My mistake. I was trying to calculate the increase in tappable equity since 2020. It was actually only a 30% increase. My original calculation included the equity I already had during 2020.

  6. Great article. I’m a huge fan of using a HELOC in certain instances. We owe about 790k on our home that is worth 2.2 in SoCal (paid 1.2 in 2019 and spent 150k on remodel). We have a 200k HELOC @ 3% currently, which we owe 0 on. I have used it in the past, and here are some examples:

    Short 50k to purchase an investment property

    Need more reserves to purchase an investment property, so transferred 200k of money to our checking for 2 months to let it be “seasoned” money. Immediately after closing transfer it back.

    Remodel a bathroom and didn’t want to burn cash, just to pay it back over a month or two

    On our last house, we owed 200k on a house worth 900k, and used a 300k Heloc for down payment on our current house, to purchase it non contingent, then sell the other house. Without the Heloc we never would have been able to purchase the “dream house” we live in now. (Moved in 2019)

    We have 6 rentals (owned with a business partner 50/50) in Heartland America (varying from 200k-650k each). The HELOC has been instrumental in getting some deals done, bridging gaps in cash, for both finance and cash deals on investment properties. Best of all, a HELOC costs 0 in most cases. I know we can get a much bigger one with US Bank, however, the lower rate was more important to me as I just use it in short instances when necessary. Our first mortgage is a 30 year jumbo fixed at 2.75%, Heloc through the same bank, we get relationship pricing with them.

    Note- my wife and I are DINKS, with annual income combined 450-500k, so cash flow is great as far as paying back HELOC when used for short term periods.

    They are great to have. With rates going up, I am expecting our rate to move upwards- but as mortgage rates are now terrible I don’t expect to be purchasing more investment properties right now. If prices pullback- then I would consider tapping to purchase another investment “cash”.

    1. So, you have a 900K mortgage on the dream house? How has that been with the SALT cap, etc.? I know Sam lowered his ideal mortgage from 1M to 750K for those that can afford it. Thoughts on your 900K mortgage?

      1. David-
        Sorry for any confusion, my first paragraph says we owe about 790k on our house. When we purchased it we took out a mortgage for 830. I have thought numerous times about paying it down to 750, however at 2.75%, with an effective tax rate of much less than that, I can’t get myself to when there are better places to put the money.

        *we do have a 200k HELOC with a 0 balance*

        SALT caps definitely suck, especially when your property tax bill is what they are in California, but nothing you can do about that.

        I have no issue carrying a 790k mortgage at 2.75%.

        I can pay it down if desired- or off load some rentals and pay it almost completely off- but would get killed in taxes. I’ve focused more on creating positive cash flow off our investment properties rather than paying down debt. With 7.5-9.5% CAP rates on them, the net cash flow they produce (after paying prop manager, mortgages, taxes, ins, main fence, etc) cover all our property taxes on our primary and a portion of our mortgage on our primary. My goal is to get them to cover all our expenses on our “dream home”. Add is depreciation, write offs, etc, and the value of having the higher mortgage vs a free and clear mortgage at this point in our earning years, pencils. Another 10 years my feelings may change and we will adjust as necessary.

        1. Gotcha. So, 830K mortgage when you purchased. I’m so intrigued about owning more property in addition to our primary which has about 1M in equity. We owe 100K and worth 1.1M. No since in paying it off at 2.75%. Keeping it as a rental is very intriguing, but generating enough of a down to upgrade the primary home is challenging in Cali. Want to ultimately end up in SoCal as well and know it’s going to probably require at least 2M as of right now to get what we want. Just trying to figure out how much of a down payment will be needed and how large of a mortgage to take on. Current home could generate approximately 3K/month in rent. I don’t even know how to really calculate how much cash flow that would deliver once paid off. Sounds like you have no regrets with the 830K mortgage. Interesting!

          1. David-
            At the time, I was sweating bullets taking that mortgage. Initially my plan was to Refi it down to 400-500k. Instead we put 100k into Reno, and another 300ish into investment properties. Although there is still a long way to go on the investments, our cash flow is great, and even after paying closing costs, if we were to sell all those investments properties today, we would walk away with close to 600k. The real benefit of the investment properties is not only the cash flow, but the tax benefit.

            We may have been aggressive these past 3-5 years- but the hope is in another 10-12 from now, that equity will be worth significant more, not just through minimal appreciation, but principal pay down as well.

            Do what is comfortable for you and your family! I do agree that SoCal will take around 2m price point for most areas now for something nice.

    2. Great examples. Thanks for sharing. Using the HELOC as a bridge loan is wise and I will add this part to my article.

      At a 3% interest rate, then paying it back in 1-3 months is very little cost.

      Also, we have to remind ourselves that in a bull market, using leverage is wonderful and easy times. I just don’t want Rieder to get caught up in the cycle of forever leveraging and then the bear market comes for two or three years.

      Then sometimes, it’s game over if you then lose your job as well. So I hope we can be more judicious right now.

      1. 100% agree with you Sam on that. Interesting note, my bank would only do a Heloc up to 60% LTV, they do prime minus 50 on the rate, so I was glad to take the lower amount for the rate trade off.

        To your point- minimum interest incurred when used property for short terms. Majority of the time I have the cash in the bank- or stocks available if needed.

  7. We had a “tappable” equity of $1M+ on our rental in CA. We had bought this house in 2003 and lived there for a while, and then rented it when bought our destination home. We took out $200k as downpayment to buy another rental in TX. Got 20-year 3.5% fixed rate for doing the cash out, and a 30-year 2.75% fixed rate for the new rental we bought. There is a catch with the cash-out refi: what I understand is that the money can only be used towards real estate to get the tax benefits. This made me very nervous about taking out more—given the craziness in the market, where finding anything was hard, I took out less.

    1. That’s a lot of tappable equity! And given you bought long ago and it’s a rental, using it to buy another rental was a good move.

      Even now, it may be OK b/c it is a like for like exchange. But it depends on how much more debt you plan to take with a new rental and your financial position of course.

      Actually come to think of it, I bought a rental in 2003 as well and it is paid off and worth about $1,250,000. I should have used some of the equity to buy more property in 2009-2010, but I had already bought something in 2005.

      Maybe now! Nah. Need to simplify life.

  8. “If you’ve locked in a low mortgage rate, it’s hard to let it go, especially if you have to go and buy a new place with a higher mortgage rate. Instead, the financially savvy homeowner may rather rent out their primary residence and upgrade to a new primary residence if they have enough funds.”

    Definitely a savvy move and something you have preached forever. I think it just presents a significant challenge for most to “have enough funds” to come up with a 20% down payment for an upgraded primary residence in high cost of living areas. It typically means something like 300K for a home in the 1.5 million dollar range. Then a 1.2M mortgage if only putting down the 20% which exceeds your optimal mortgage amount of 750K. Would need 750K down to get to the ideal mortgage.

    By chance, does the income generated by the rental income factor into the minimum percentage down/ideal mortgage amount for the new residence? I would love to figure out a way to pull this off while upgrading lifestyle.

    1. Yes, hard, but doable after a number of years of further saving and investing.

      Rental income general is discounted by 30% by banks when they look at your P&L if you decide to take out a new mortgage to buy another home.

      Being able to rent out the home with a low fixed rate primary mortgage really is a good spread. Of course, banks don’t want you to rent out your primary immediately after closing. But after a year, you can do what you want.

  9. For a long time some folks took their HELOC money and invested it, figuring 10-20% in the market every year easily outpaces the 2-5% interest on the money. Will be interesting to see how that dynamic plays out with many now underwater on investments and seeing their HELOC rate rise significantly. Could be trouble. 12 year bull markets tend to also leave their scars.

    1. Yes, it’s been easy money for so long. I hope people focus more on capital preservation and not losing all their progress.

      I’ve got a couple stocks that have given up 2-5 years of gains in just nine months, e.g. Netflix. Very sad to just roundtrip!

      But with real estate, things are more steady eddy up and down. Just don’t go too far over your head with debt and real estate investors should turn out fine.

  10. While I have a small “emergency” HELOC that I’ve never touched, I’ve seen too many people lose everything because they kept cashing out every time their home value went up a bit. It hits a bit too close to home (no pun intended) for me to do that.

    When the time comes, I’ll be happy to sell my house along Colorado’s Front Range and pay cash for a house in a less expensive part of the country with the equity, getting rid of my mortgage in the process (no mortgage payment means I need less available cash every month for life). But until then, the equity stays in the house.

    I think your wise to encourage people to not cash out.

    1. It’s good to have a HELOC as an emergency just in case. Also good to set it up now when times are still good.

      Back in 2008-2009, the majority of banks stopped offering HELOCs because of a decline in home prices. The banks couldn’t modeled out the home equity properly and the banks wanted to be conservative.

  11. First time I’ve heard this term! I don’t have any plans to use the tappable equity in my home, but good to know what it is if I ever really need it down the road. I agree that it’s not something to use unless you really need it. A relative of mine has been way too reliant on using HELOCs to pay for things she can’t afford. As a result she’s no where close to paying off her mortgage, which otherwise would have been paid off decades ago. At least she’s refinanced to lower her overall interest rate, but it’s not really helping that much because of her spending habits.

  12. Hi Sam!

    What are your thoughts on using a HELOC to invest in commercial real estate deals? Current variable HELOC rate of 3% (soon to go up) and IRR projections on the real estate investments in the 15%-20% range. Great article. Thanks!

    1. It’s great if it works. But there are no guarantees with any investment. I’ve seen some CRE deals go belly up after advertising 15%-20% IRR projections.

      The key is for the sponsor to have enough skin in the game and there be enough equity to NOT get wiped out in case prices decline or the sponsor can’t get the price they were projecting.

      A related post talking about the capital stack: https://www.financialsamurai.com/capital-stack-debt-versus-equity-real-estate-investing/

    2. Don’t do it! Rate spike is going to crush commercial valuations and the buyers at these low cap rates will regret their decisions within a couple of years. I wouldn’t risk my primary residence equity position on a commercial property and if you’re referring to crowd funding commercial transactions steer clear (i.e., RealtyShares story). Pie in the sky IRR “projections” and if the deals were that sweet they wouldn’t be promoting them to you via advertisements.

      Now is the time to lay low, opportunities will arise.

  13. Thank you for the informational articles. I’ve been reading your articles for years now and always find your perspective very interesting…

  14. Interesting. We own 8 properties today (7 rentals) and just did a cash out refi on 3 and a second mortgage on 3 (since the original mortgage included all three properties). The interest rates ranged from 3.5% to 5%. Our intent is to take that money and purchase more properties with returns higher than the interest rates of the refinances/second mortgage. Effectively pocketing the difference.

    I think there is good and bad debt and the classification depends on what you purchase. I’m viewing this as good debt to further increase the amount of real estate we own and to drive more passive income and equity growth but if I were to spend it on a new car that I don’t really need, then it’s bad debt.

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