It has been a while since we discussed money matters – so today we are going to quickly talk about home equity loans (HELOC) and how you can use them to maximize your returns.
The readers of The Ultimate Alpha Project know that, alongside with maintaining exemplary health, physical strength and mental capacity, financial success is a major part of being an Alpha and kicking butt in all areas of life. You also know that I consider real estate one of the very few investment vehicles that are worth your while. Let’s see how HELOC loans fit into the bigger real estate investment picture.
Life before HELOC
Because banks do not lend 100% of the value in question, a typical buyer ready to purchase an investment property needs to come up with at least some down payment – typically around about 20% or so. The actual amount of such down payment depends on where you live and what types of properties you specialize in. Let’s say that a “starter home” in a densely populated and otherwise promising suburban area that satisfies other investment criteria, would cost you $300,000. This might mean at least $60,000 as a down payment. Add legal, land transfer tax and other closing costs – and you are potentially looking at more than $65,000.
What do most people do? They save up first for that down payment. But what if you run out of personal funds or simply want to accelerate the process? Naturally, your only other avenue is borrowing to invest (using other people’s money to generate profits for you). We have briefly touched upon the benefits of a properly managed debt in one of the previous articles – borrowing to invest in a profitable project is always a better option because it generates an infinite return on investment (ROI), because there really is NO initial investment out of your pocket, only the return. Essentially, you are creating money from nothing.
I am planning my retirement future. Not in a traditional sense, such as preparing for austerity, downsizing my living space, restricting spending and depending on others, including the Government (we have seen in the article on tax-deferred plans that this could be a bad idea). By contrast, my plans have some grandeur, financial freedom, and ever-increasing quality of life.
I do not plan to be forced to significantly reduce my spending after retiring at the risk of having to eat cat food otherwise. I do not anticipate being involved in the typical cliché retirement pastimes, like playing bingo, doing gardening and living off some modest investments with no aspirations and occasional trip to a tropical location in the cheap part of the Caribbean (at most).
Unfortunately, this typical post-retirement scenario is what most people will face. A lot of soon-to-be retirees will have to face this harsh reality – not the perfect lives filled with smiles, walks along the beach in Bali while holding hands, luxury cars and multiple cottages, as painted by investment companies who want your money – but the actual struggle to live from pension cheque to pension cheque and living in hopes that the money they have managed to accumulate in the past doesn’t run out too soon.
What do topics related to real estate investing or how to become rich have to do with being an Alpha?
Quite a lot, actually. Remember, an Alpha (-male or –female) is a leader, role model and super-achiever in everything. And although we mostly discuss health, nutrition and how to crush it in the gym (because health and physical fitness is your foundation for succeeding in everything else), we do, sometimes, venture into other topics relevant to creating your perfect lifestyle.
One of these topics is money.
It is no secret that with more money you get more freedom – freedom to support your progress in all other relevant areas, freedom to eat higher quality food, freedom from the shackles of an unsatisfying job, freedom to make your own choices, freedom to pick the best gyms and the best equipment and freedom to use your time as you see fit.
Being in debt historically never seemed to be a good thing. It appears that since the beginning of time, it has been cultivated and ingrained in the brains of people that as long as you are in debt – you can’t sleep well. Some noble men of the distant past would rather commit suicide rather than declare bankruptcy and admit that they have amassed a lot of debt. Debtor’s prisons up to the middle of the 19th century used to be a common way to deal with unpaid debt. In some early states of a distant past, if you couldn’t pay debt you could even become a slave of a creditor.
Things have changed quite a bit since then. Bankruptcy laws in most countries generally protect debtors from suffering the consequences of unfortunate events. Aggressive marketing of credit products in our day and age encourages us to take on more debt. Starting from their late teens, people are being aggressively targeted by credit card companies and banks offering starter accounts. Student loans are available in many countries to people who are just starting their adult lives – and wouldn’t mind starting it with a large debt. These days it is almost impossible to find a person who doesn’t have credit in some shape or form. And most people do not consider this wrong or immoral.
At the same time, compared to reckless spenders who amass expensive credit card debt and never seem to be in control of their own finances, there are people on the other end of the spectrum who would do anything possible not to owe anything to anyone, for whom being debt-free is still considered the ultimate goal. Many people celebrate paying out their mortgage in full (possibly, the largest debt every person has), as if it were some very significant achievement. Personal finance gurus preach from pages of countless books that being in debt is bad and you should do anything possible to repay it sooner. Scared of the uncertainties, a lot of people still prefer to buy stuff with cash or not buy it at all. Whipping out a wallet and paying for everything upfront seems to be give some people the ultimate pride of being in total control.