Investment Line of Credit: One Way to Finance Your Florida Getaway
Over 720,000 home buyers purchased vacation properties in 2016, according to the National Association of Realtors (NAR). That same year, Florida had the largest stock of second homes with 15%, or 1.1 million, of all second homes. People have many reasons for buying vacation properties. Some want a place for the dual purpose of a vacation escape and where family and friends can visit. Others might want a place where they could put down roots and get ready for their future retirement. Then, there are some that are looking for a vacation spot that is also an investment property. Regardless of the reason for purchasing a Florida getaway, you will have to consider how you will finance the property. One thing to consider is borrowing against your investments with an investment line of credit.
Borrow Against Your Portfolio, Not From It
Your first impulse when you find the right Florida home might be to write a check immediately. This could put your short-term liquidity at risk. You may consider selling off some of your investment holdings. However, that could throw your long-term investment strategy off course.
Borrowing the needed money against the value of your portfolio is a good way to avoid both traps. Securities-based lending is where investors take out a line of credit using some of their investments as collateral. An investment line of credit is often a faster and more cost-effective form of borrowing compared to other alternatives.
Home Equity Line of Credit
The largest benefit of a Home Equity Line of Credit (HELOC) has changed because of the Tax Cuts and Jobs Act. Now, taxpayers can only deduct interest on a HELOC when the borrowed money is used to “buy, build, or substantially improve” the home the loan was for. So, the interest wouldn’t be deductible if you were to buy a Florida getaway with a HELOC.
Without this deduction, an investment line of credit may be better. In most cases, you will get a better interest rate, and it takes less time to get than a HELOC. This is important for you to know if you need to make an offer immediately on a Florida getaway.
Benefits of an Investment Line of Credit
There are many benefits to borrowing with an investment line of credit. Here are just a few:
- Fast application and approval
- Little paperwork
- Competitive interest rates
- Have available cash without selling off investments
- Won’t incur capital gains tax
- Doesn’t change your portfolio allocations
- Allows you to offer cash on a Florida getaway in a highly competitive real estate market
- Keeps your assets working for you
Questions to Consider Before Taking Out an Investment Line of Credit
Be sure to take time to understand the risks before using your assets as collateral for an ILOC. Get answers to all of the important questions on how it could impact your long-term investment goals.
Here are some questions you should ask:
- What am I agreeing to when I take out an investment line of credit? Make sure you understand all the details fully. This should include the terms of your agreement with the lender, potential tax consequences, and costs.
- How will my broker be compensated? Your broker, or adviser, might get additional compensation by selling the line of credit to you. They also will benefit since you don’t have to liquidate assets to pay for your Florida home with cash. This will diminish any potential fees and commissions your broker would earn.
- Can I move firms if I have an investment line of credit? It won’t be easy to pick up and move your assets to a new firm once they have been pledged as collateral for a line of credit. You will probably need to pay off the loan to move.
Give us a call if you are thinking of purchasing a Florida getaway. We can discuss all of the financing options, including an investment line of credit, and can provide you with our list of preferred experts.