I am not an overly sophisticated money man. Please do not take what I am saying as any more than the musings of a probably-too-reckless twenty something. I understand the basics of the sort of investing you always read you should do, but I am a product of a markedly working-class upbringing. I worked at an industrial truck tire shop for years before I was handed my white collar by the Supreme Court of Pennsylvania. Cars were bought and sold or parted out. Flea markets were scoured. I used to be versed in the going-rate for recycled steel and brass. To me, investing was always a hands-on endeavor. And what’s more, we didn’t call it investing. We were just “making money.” So when Roland Stock had a staff meeting regarding their 401(k) plan, I chose to work instead. When one of my colleagues asked why I wasn’t interested in participating in the 401(k), all I could think was “because who ever made their fortune investing in their 401(k)?”
But, before you write off that admittedly ignorant sentiment — there are very clear benefits to a 401k, which I encourage you to inquire about with a financial advisor — understand that I am absolutely not suggesting that you not plan for retirement. What I am suggesting is that your company sponsored 401(k) is not your only option. And maybe you’re like me and you think the oft bandied right-and-proper way of investing is just too hands off, at least at this point in your life. Well. While my days of cutting the catalytic converters off of junk cars for the platinum are over, I may be able to help some.
My retirement plan has always been the same. Here’s a simplified version: Buy real estate free-and-clear. Take out a Home Equity Line of Credit (HELOC) on the real estate. Rent the real estate out to pay back the HELOC. Buy more real estate. Rinse and Repeat. This requires a fair amount of discipline at the beginning, because you need liquidity, and it requires a more than negligible amount of dedication to property maintenance — but it can be quite lucrative. We’re going to spend a little bit of time on this subject. I believe it’s good for everyone to understand that this is an option, but there are potential pitfalls and nuances to this plan.
We’ll start simple. My plan is highly dependent on acquiring a Home Equity Line of Credit (HELOC). It sounds intimidating, but a HELOC is easy to understand when you consider it as a form of a mortgage. Essentially, a HELOC allows you to borrow against the available equity in a piece of real estate – meaning you can borrow the difference between the amount you owe on a piece of real estate and the amount the real estate is worth – up to usually 85%.
So let’s consider a home bought free-and-clear that is worth $100,000. You successfully apply for a HELOC and receive what is referred to as a “line of credit” of $85,000 from a lender. In return, the lender uses the free-and-clear property as collateral just as they do when they lend you money on a traditional mortgage (your real estate is no longer free-and-clear, by the way). This credit line is treated very much like a variable-rate credit card. You can borrow – in cash — as much or as little as you’d like against that $85,000 in what is referred to as the “draw period” (which is typically 10 years), but you will be required to pay it back during the “repayment period” (which is typically 20 years) lest your real estate be foreclosed upon.
You can see the potential here. That $85,000 can be used to buy more free-and-clear homes. But – you might be wondering – where are all these miraculous homes I’m speaking about? Where can you buy a home worth anything at all for $85,000? You’d be surprised. There are several ways to find homes. And the next article I write is going to speak to that matter.