Scaling a Portfolio: Line of Credit
Lines of credit are another great tool in your investor toolbox. These are pretty straight forward and can pair well with a loan if looking to do a deal using 100% financing. With a line of credit, you only pay for what you draw from a limit that you are approved from. This is better than a conventional home equity loan because you are only paying interest on what you draw from it, thus ensuring you are only paying interest on capital that you are actually using. One of the most popular lines of credit is a home equity line of credit (HELOC).
A home equity line of credit (often called HELOC, pronounced Hee-lock) is a loan in which the lender agrees to lend a maximum amount within an agreed period (called a term), where the collateral is the borrower's equity in his/her house (akin to a second mortgage). - Wikipedia
An advantage of HELOCs is that they are generally interest only payments, which can be used to implement velocity banking (a subject for another time) and minimize the cost to you.
You can use your line of credit to fund down payments on new investments, enabling you to move quickly and stay as liquid as possible. You can also use it as a great way to fund renovations or use as an emergency fund. Downsides to the HELOC are:
Interest rate is variable, so monthly payments can be unpredictable, especially when rates are rising as they now are
If your home value falls, you could end up owing more than the home is worth.
There are also private money lines of credit. These are generally offered to more experienced investors (3+ rehabs or flips), but can significantly reduce the closing costs normally associated with private money deals, like a high limit credit card. Their value is not tied to the value of your assets and they automatically replenish as they are paid back.