Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions.

Today's question comes from Jonathan and he says: "Hi Marco. I've been enjoying your podcast for a few months now. Answers from a professional to questions, many have has been quite educational and you are welcome. My question involves analyzing the risk-reward of a cash-out refinance to utilize a portion of the equity from our primary residence to hopefully launch into real estate investing. My wife and I have lived in this home in Oregon for the past 10 years. Current equity is about $200,000 but recently tied this to a HELOC for $46,000 which was used to remodel a large portion of our home. We are both around the age of 50 and have been paying into 401k's from our W2 jobs but do not have a longterm investment strategy beyond that, single-family homes or small multi-units would be of interest and not necessarily in our current market with a structured goal to scale over time. Thank you for your time!  ~Jonathan."





Thanks for the question. Jonathan. This is a good one and if you haven't seen or heard the episode that I released just recently, I believe it was number 224 titled $700,000 Equity to Invest - A "Live" Client Call. I went into this in a fair amount of detail on that call, but that was a live call that I had recorded. So I'm going to answer your question and give you the bullet points and I actually suggest you listen to that episode. But I will give you a good overview right now just to compare and contrast what you might call the risk versus the reward. And I've talked about this on and off over the years on other episodes. Just touching upon it and diving into some of the detail here and there, but I'll just kind of paint a very simple hypothetical example here using round numbers.

Just to give you the answer to your question about the risk and reward. I guess let's look at this as two phases. In phase one you're going to have a hilar, a home equity line of credit and there's a cost in using that equity. You don't actually pay anything until you draw from that line of credit, but once you do, you're paying typically an interest-only monthly payment, but what you need to consider is what is the gain in using that equity for investment purposes. In other words, if you can unlock that dead dormant or idle equity that you have in your principal property or for that matter any property, it doesn't have to be your principle residence. If you can take that equity and turn it into liquid investible capital and turn that into income-producing assets that produce more in terms of cash flow than the cost of using that equity.

Then what you've done is you've arbitraged the cost of using that equity in the form of a HELOC against the gains you're going to receive from your new investments, your new rental portfolio or whatever that might be. So let me give you an example here. We're going to make a couple of assumptions. First of all, the average interest rate as of today on a home equity line of credit is 4.75% so if you, let's say, tap into $100,000 of your idle equity in your property and turn that $100,000 all of it into a used line of credit. So you're pulling out $100,000 through the hilar, you're looking at an interest-only payment of $4,750 per year. Divide that by 12 it's roughly about a $400 per month interest payment. It's actually $394 in change. But let's call it $400 a month on the hundred thousand dollars of liquidated equity from your property.

Now let's also make an assumption that you are going to take that a hundred thousand and turn that into for single-family homes of $100,000 each. You can slice and dice this different ways. You can turn it into five properties of let's say $80,000 each or three properties of about $130,000 each, whatever the case is, let's call it for single-family homes. Let's also say that the net cash flow from each of those properties is $300 a mont...