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Is It Worth It To Borrow Money to Invest in Real Estate?

Episode 039

John Larson and the Real Estate Cowboys talk passive income real estate investing.

Hear new episodes every Sunday morning at 8 a.m. The Cowboys talk about the pros and cons of borrowing money to invest in real estate? Is it always worth it? Find out!

Keep the #CowboyCoffee hot while listening to John, and the Cowboys talk about how to #BeACowboy and earn passive income in real estate.

Episode Transcript

Keith Weinhold: Hey, this is Keith Weinhold from the Get Rich Education podcast. You are listening to my friend John Larson and the Real Estate Cowboys. Don’t quit your daydream. 

Robert Helms: Hey everybody, it’s Robert Helms, host of the Real Estate Guys radio show, and you are listening to the Real Estate Cowboys. 

Announcer: Have you thought about becoming financially free through real estate investing, but don’t have the time or knowledge to get started? Welcome to the Real Estate Cowboys podcast. Each week we discuss passive income investment opportunities in the red hot Texas market. John Larson and the Real Estate Cowboys will show you how to leverage their team to build wealth in real estate through passive investment opportunities. And now here’s John. 

John Larson: Hello everyone. This is your host, John Larson. Welcome to another episode of the Real Estate Cowboys podcast. This week we are talking about borrowing money to invest in real estate and is it worth it? I believe it is. Many of my other friends in the real estate investment world believe it is. Keith Weinhold of Get Rich Education is really, really big, using debt, good debt to invest in, you know, properties that generate income for you. And he’ll tell you that financially free beats debt free every time, and I’m a firm believer in that as well. Dave Ramsey, who’s very, very much against that, to the point where he has no debt to where he doesn’t even have a Fico score is on the other end of the spectrum and I don’t really, really agree with everything that Dave Ramsey says. I will say that I used some of his practices to help pay down my own debt, but I’m fine with that. I believe that there’s good debt and bad debt and if you’re, if you have good debt, you’re, you’re good. And so, you know, like I said, not all debt is bad if leveraged properly. And so a good example that Keith has given before is why would you pay off your car loan or your personal residence when it’s at a four percent rate? Instead, you could have the opportunity to invest those dollars into something that produces an income stream; perhaps paying you nine percent. And when you borrow at a lower rate to invest in something that produces a higher rate, the difference is an arbitrage. You also want to remember, you want to invest in something that pays you income every month like a rental property or become a private lender, which are two solutions that we offer at American Real Estate Investments and the Real Estate Cowboys. 

You will see if you invest in the stock market, if you get a nine percent capital return from stocks, you aren’t paid that until you sell. And obviously, there’s the stock market just fluctuates so much. So today’s nine percent return could be tomorrow’s negative nine percent. That’s one of the reasons why I really am not as much involved in the stock market. I do know people that make a lot of money in the stock market, but they are watching it on a daily basis where I’m looking for more passive opportunities because I just have so much going on. I can’t really watch the stock market like some people do. And they’re buying and selling daily most of these people. So I’m just not really really big on it because of that. You know, outside of obtaining finance from the big banks out there like the Fannie Mae, Freddie Mac’s, or going to a private money lender, which I feel like there’s one on every street corner at this point. You know, and rates are going up at this point. The Wall Street Journal prime rate is at five and a half percent. Everything that we’ve been seeing, all the indicators that have been out there have been pointing towards another rate increase here in 2019. More increases to come, which means that the hard money is going to become more expensive as well. 

Where are some other, what are some other avenues to borrow money to invest in real estate? So not everybody out there is sitting with, you know, $50,000, $60,000, hundred thousand or more in their bank account to invest in real estate. But there’s a lot of financing options out there which gives people the opportunity who maybe have 10, 20, $30,000 in their account that they want to invest. There’s a lot of options out there where you can kind of get in the game. And a lot of them are our leverage options. And so outside, like I said, of the big banks and hard money lenders out there where rates aren’t so attractive, they’re not as attractive as they used to be. What are some other ways that you can borrow money to do real estate investments? Right? Or become a private money lender. So on and so forth. So when we get back, we’re going to take a quick commercial break, when we get back, I want to talk about a few different options that I’m sure some of you know, but maybe some of you don’t know. We’ll talk about, you know, is it smart to use some of these options to invest in real estate and does it make sense to borrow money when investing so stay tuned. We’ll be right back after this message. 

And welcome back from that quick break, this your host, John Larson. This week we are talking about borrowing money to invest in real estate and is it worth it? So I want to get into a couple of different options out there that not everybody may know about because so many people have been borrowing money with a 30-year fixed loan through Fannie Mae. And the rates have been really attractive for a long time, but now they’re starting to creep up a little bit and hey, maybe some of you, you’ve already maxed out those Fannie Mae loans. Everybody gets up to 10. And now you’re looking for some alternative finance options and maybe you’re thinking yourself, does it make sense to actually take advantage of some of these other options out there or you know, is it just not a good time for me to buy right now? I’m a little cash strapped and I just don’t like these alternative funding options. 

But maybe you just don’t know about these other funding options that are available to you. So that’s why we’re doing the show this week. Number one would be, borrow from a life insurance policy. And not many people know that you can borrow money from your life insurance policy. Whole life insurance policies have cashout values. Some of you probably already know that, but did you know that you can also borrow against your whole life insurance policy at a pretty competitive rate? And so the benefits of this would be, you know, the average rate on a two-year personal loan is just over 10 percent. The average interest rate of a credit card is almost 14 percent. So that right there is a, it’s an alternative source of funding. And if you need a short term loan, maybe it makes sense at 10 percent, right? I mean at, at this point, right now we’re borrowing money from our investors at 10 and a half percent. So this is even slightly more attractive than that. You can repay the life insurance loan on your own schedule. So there’s no schedule for repayment. That’s one pretty big benefit. You aren’t required to repay the loan, but if you don’t, the outstanding amount is deducted from the policy’s death benefit. So most people are going to want to pay that off. And you don’t even have to qualify with a certain credit score, so there’s no credit check, anything like that. Whereas you’re going to get into that obviously with a Fannie Mae lender. The big banks out there and a lot of even hard money lenders will require a credit score of some sort, a lot out there that are non-recourse, just underwrite the property itself and make sure that it’s a good deal for them to loan on and they want a pretty substantial down payment to grant that financing. Some of them are going to; the recourse lenders are still gonna want a credit score. To get a life insurance or borrow from a life insurance policy, you just have to call your insurance representative and tell them that you’re interested in borrowing on the policy and that rep should let you know how much you can borrow and what the terms will be. And you could get the funding very quickly. You can have the money in your bank in as little as a week. So if you need money quickly, if there’s a deal out there that you need to jump on, you’re just not that liquid at this time, this is an option that you can explore. 

Another option out there that’s pretty popular and has gained popularity is borrowing from your 401k. So the IRS allows participants to take out a loan based on the amount in the account and you do not need to apply or qualify for the loan. Loan amounts, repayment periods and interest rates will vary, so you’ll want to speak to your custodian to work out the details, but the rate is typically one percent plus prime, so prime’s at five and a half right now. You could get six and a half for a loan through the 401k, so not bad. 

Another option would be a home equity line of credit, and that interest rate, however, is adjustable. It’s tied to the prime rate, so you could be paying more or less interest than other loan options. It’s really gonna depend on what prime is at the time, so it’s gonna fluctuate. Your HELOC could extend from five to 10 years depending on your needs. One of the benefits is that you don’t have to pay interest on any draw you don’t take and so when you take a draw, the clock is going to start ticking. So we’ve had investors actually do a HELOC and invest in rentals. I’ve had investors do a HELOC and invest in private lending as well. And so they’re taking a little bit of a gamble because the rate could go up and they’re on a fixed rate on the private lending side, but typically I can’t see it going up to a point where you’re not making any money by leveraging this money. You know, so let’s say you borrow the money from the HELOC at six and a half percent and you’re being paid from American Real Estate Investments through our private lending model at 10 and a half percent; you’re still making four, four percent on your money, which is pretty good. That’s very passive, right, and a fixed amount. But if that HELOC, if the rate goes up, the Wall Street Journal, uh prime rate goes up, you know, you’re only make ten and a half percent on the money. So if it goes up a point, you’re now maybe only making three percent, right? So that’s just a little bit of a gamble that you’re taking, but the home equity line of credit, or HELOC rate as of January 11th of this year. The average is 5.73%. That has been the average out there, so. 

Another thing you can do is you could take out a home equity loan. Now with the home equity loan, it’s a straight loan against the equity in your home. Okay? So it’s gonna be a fixed rate. You also do not need to qualify with a credit score. With this type of loan, you’re going to get a lump sum that you can use to do real estate investments or anything else that you want to invest in. You’ll have fixed payments over time with a fixed interest rate. And your repayment term could be up to 30 years since a home equity loan is essentially a second mortgage. I see a lot that are like 20-year terms, but you could probably get up to a 30-year term on a home equity loan. We have a lot of investors that do that as well. At this point in the market, there’s a lot of investors that are sitting on quite a bit of equity. A lot of investors I know out of California that are sitting on a lot of equity in their home. They don’t want to sell. They’d like to release some of that equity and the only way you can make equity tangible is by doing something like this, a home equity loan or my next option, sell. 

Or next option would be a cash out refinance on your home. So if you’ve owned your home for a long time, you could do a cash out refinance. This isn’t technically a loan because you don’t have to repay the money. But assuming you have enough equity, you can refinance for a larger amount than your original mortgage. You then will have a brand new mortgage with new terms. Typically you want this at a lower interest rate, right? It needs to make sense, than when you originally made your purchase and you get the extra money in cash, which gives you the opportunity to invest in real estate. So this has been a very popular one, too, with my investors. A lot of my investors have done cash out refi’s, bought more property. They’ve leveraged their own rental properties that they currently have that were sitting on quite a bit of equity and they wanted to make that equity tangible because equity, it’s kind of like the stock market. Until you buy or sell, right? Until you sell or do a refi, that equity’s just kinda sitting there. It’s just kind of fairy dust, right? You need to make it tangible. You need to put money in your hand. And then you can go do other things with it. I definitely recommend taking it and investing though, into other real estate properties. So I’ve had investors, you know, that had five rental properties that all appreciated. Um, some guys here in the Texas market, all of them appreciate it, probably an average of 30, $40,000. They did some refinances on those properties, took that money out, and then now they had new down payments to go buy new properties and they essentially just doubled their portfolio by just doing a cash out refinance on the five homes that they own. Really, really good option out there if you’re sitting on some equity. And like I said, I think it’s a good, I’ve talked about this on the show before. It’s a good time to do a cash out refinance right now because I do feel like there’s some volatility in the market where we could be going on a downward trend. And some property values are going to start dropping again. So you want to take advantage of this when it’s at the height of the market. We’re still at that height, although we have seen some correction in certain areas around the country and even certain neighborhoods, right? Some of the higher price point neighborhoods have slowed down a little bit. Days on market have increased, months of available inventory has increased. We’ll see how this summer goes, but I definitely think there’s going to be a little bit of a slow down because of the rising rates. I’ve already been speaking to mortgage officers out there, loan officers out there, mortgage brokers have been saying, less and less new applications have been coming in lately. 

So that’s a sign that there’s not as many buyers out there, but it could also be the time of year. Uh, but I do think with the rising rates you’re going to see a cool down in the market for sure. So those of you who are listening that have some equity in their home and would like to do possible HELOC or a home equity loan or a cash out refi. I think that this is the time to do that. I think that there’s some good options out there for you to put that money to work for you. I’m still taking a wait and see approach on the rental market. I do think with the decrease of buyers coming into 2019 is going to result in more renters, which is good for all of us property owners that own property. Now if you’re just trying to get into the game, I would kind of wait and see how things are going to transpire here. 

Uh, because like I said, you’re not getting as attractive finance from Fannie Mae as you were in most recent years. Let’s take a wait and see approach. Let’s see some prices start to come down in some of these markets, even some certain areas of Dallas where some prices ran a little too high, I think are starting to correct a little bit. So more opportunities are going to start opening up. And like I said, I think the opportunity to keep properties leased and get them leased quickly, that’s going to increase greatly because of the fact that I just, I see it being less and less attractive to buy as the rates are going to continue to go up. So that will cause a little bit of a cool down. But like I said, if you’re sitting on a property right now that has equity in it, I would definitely look for some ways to unlock that equity and get it to work for you and some other options out there. 

Another option that you have, which I, you know, most people probably don’t want to go this route, but you could borrow from a friend or a family member. You could have some friends and family out there that have quite a bit of money that would love to put that money to work for you in a kind of private money lending fashion. What I would recommend is that you should put a formal arrangement in place and something written and signed with repayment terms because no borrowing is worth risking, you know, a relationship over. But if you have family members who are interested in funding your real estate venture, you know, a contracted loan might be something to consider. I know a lot of people that have gotten their start in real estate or started their business from a loan from a family member, you know. So I wouldn’t completely rule it out. Some of our family members out there have quite a bit of money. You know, they could help us get started on, uh, funding opportunities for us. So that’s what I have on borrowing money. Do I think it’s smart to borrow money in real estate? Absolutely. You know, real estate provides some of the best opportunities out there for leveraging. Fannie Mae in itself, thirty years with only 20 percent down. Thirty year fixed rate is some of the best financing you can get in the entire world. And it’s been great of late because the rate’s been so low. The rate’s creeping up a little bit which is scaring some people. Although it shouldn’t really because anything history has shown us anything below seven percent is still a solid rate. I know on the investor side, investors are looking at six and six and a quarter to borrow money from Fannie Mae is kind of high. And I think the reason that they believe that it’s high is because the prices have gone up so much. Because we’ve been in such a healthy market for so long, but you know, coming out of a recession where property values are still very affordable and your rent to price point ratios are still very much intact and very close to that one percent, you know, price point to rent them out, a six percent rate wouldn’t really have much effect on the cash flow that you could get from the property and the rate of return on cash flow. But because we’ve been in such a healthy market for so long and the inventory has been so low for so long, it’s caused prices to really rapidly increase to where now the cap rates aren’t very attractive. And when you add in the rising rate, you’re really, really constricting that return on cash flow and it’s really becoming compressed. 

So I understand where investors are looking to kind of wait and see. Trying to see some pricing come back down. I don’t think the rate is going to come down. I think the prices are going to come back down before the rate comes back down. That should then shake loose some more opportunities in the market for solid rentals that are not just good cash flow opportunities, but very safe opportunities, good neighborhoods, good exit strategies, good tenants. You know, that’s what we’re looking for. That’s what I’m looking for as an investor because a passive experience is so, so, so important to me. Cash flow is great, but the passive model is very important. I don’t have a lot of extra time in my day to deal with a bunch of crap. Tenants not paying, bunch of maintenance on my property, my property getting broken into. I don’t have extra time in my day to deal with things like that. 

So I really, really like to focus on very truly passive investment opportunities and that’s why I love our private lending model because you just loan some money and you get a fixed payment each month and there’s not a lot of babysitting and watching and it’s just not there. And investing in the right rentals, right? And I really only like to invest-I say this all the time-high B to A class properties and guess what? High B to A class properties have not been spinning off the most attractive returns of late. So that’s why I’ve kind of slowed down on buying rentals at this point, because it’s become very hard for me in Dallas to find good opportunities in neighborhoods I’m comfortable with that actually spin off a solid rate of return. There’s still opportunities to see equity growth in a lot of these areas of Dallas, but also the volatility of the market, coming into the market here in 2019, the buying pattern’s slowing down. I’m talking to real estate agents and they’re telling me that the days on market are coming up to two months. You know, we haven’t really seen that of late, so that just makes me want to take a wait and see and that’d be my advice to you listening. Just a little bit of a wait and see here. See if the real estate market really starts to pick up again in a lot of these areas across the US here in the spring. I’m kind of forecasting that it’s not. I think we’re definitely gonna see a slow down this year, but like I said, those of us that own rentals already, I think that the rental market is really, really going to pick up here in 2019. Whereas there were so many people buying over the past few years. In recent years, a lot of buyers out there. I think that you’re going to start to see a lot more renters hit the market, which is good for us. That means we can start pushing up rents in certain areas. It means that we can keep our properties leased for longer terms, you know, less turnover. So that’s something that I’m optimistic about. 

If you like what you heard on the show this week and are interested in obtaining some finance for your first real estate deal, you can reach out to us, myself and my knowledgeable team here at the Real Estate Cowboys. We have a lot of relationships with lenders around the country, so if you’re looking for finance, we can help you. If you’re looking to become a lender, we can help you. If you like that idea of being the bank and holding first lien position on an asset in a market like Dallas here and earn double-digit returns on your money, fixed. Reach out to us and 

Just put your information in and a member of my team will reach out or you know, hey, if you’re somebody that’s doing a HELOC or you’re doing a cash-out refi and you want to put that money into some single family homes and take advantage of the tax benefits that are available to you as well, coming into this new year, 2019. We can also assist you with that and I can give you some, you know, offline advice on markets that I’m really looking at and markets that I’m kind of cooling on. But if you listened to last week’s episode you saw Pricewaterhouse Coopers just put out their report for their market trends for 2019 and DFW is number one on their list for markets to be looking out for, to invest in and was not surprised to see that, so. 

Like I said, if you like what you heard on this week’s episode, go back. We have plenty of episodes from this past year that you can relisten to either through iTunes or on our website, All the past episodes are housed there. Go back and take a listen and like I said, if you’re ready to take action, if you feel like 2019 is your year, you want to get into some of the great opportunities that we have and the great markets that we’re working in. We can help you. That’s what we do. We build passive income streams for investors. Also, if you haven’t yet, check out my book, The Passive Income Guide. If you’d kind of like to digest all the information that we’ve talked about here on the Real Estate Cowboys in a quick and easy read, go to the website You can buy the book there. You can buy it on You can buy it off Amazon. It’s called The Passive Income Guide: What is Your Return on Life, and that is by me, John Larson. Thanks again for tuning in. I will see you all next week and always remember, what is your return on life? This is John Larson signing off. Have a great week everyone. 

Announcer: All opinions expressed by the host of the show are the opinions of American Real Estate Investments LLC and do not reflect the opinions of guests or sponsors. No personal or professional advice on this program should be considered an endorsement to follow a real estate financing or investment strategy. Before acting on any information, seek advice from your financial tax, mortgage or real estate advisor, as the information is not guaranteed and investment strategies have the potential for profit or loss.