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Leveraging Your Equity: The SHRED Method and HELOC for Real Estate Investing

by | Jul 2, 2024 | 0 comments

In the quest for financial freedom, leveraging existing assets to work harder for you is a key strategy. The SHRED method, combined with a Home Equity Line of Credit (HELOC), exemplifies this approach by enabling homeowners to aggressively pay down their mortgage and reinvest their savings into lucrative opportunities like passive real estate investments. Let’s delve into this concept through the journey of Alex, a dedicated software developer who aims to retire early through wise investment choices.

The SHRED Method Explained

The SHRED method is a strategic approach to debt management and investment that stands for Save, HELOC, Reinvest, Equity, and Debt-free. It’s designed to optimize financial resources to achieve debt freedom and wealth accumulation simultaneously.

Why People Use It:

The SHRED method appeals to individuals seeking a proactive strategy to eliminate mortgage debt quickly and use their home’s equity as a springboard for investment. It’s particularly attractive for those looking to reduce interest payments over the life of their loan and accelerate their path to financial independence.

What It Does:

By using a HELOC to make substantial payments toward the mortgage principal, the SHRED method effectively reduces the amount of interest accumulated, shortens the loan term, and increases home equity at an accelerated pace. This method frees up significant capital that can be reinvested into income-generating ventures.

How It Works:

  1. Save: Accumulate savings or redirect a portion of income towards a HELOC.
  2. HELOC: Secure a HELOC and use it to pay a lump sum toward the mortgage principal.
  3. Reinvest: Invest the savings from reduced interest payments into passive real estate opportunities.
  4. Equity: Utilize the growing home equity for further investments or as financial leverage.
  5. Debt-free: Achieve mortgage freedom much sooner than the standard loan term, allowing for greater financial flexibility.

Who It’s For:

The SHRED method is ideal for homeowners with substantial equity in their property, stable income, and a commitment to financial strategy. It suits those comfortable with leveraging debt to create wealth and disciplined enough to manage the revolving credit line without accruing additional consumer debt.

Who Shouldn’t Use It:

This strategy may not be suitable for individuals with unstable income, those who are not disciplined with credit, or anyone uncomfortable with the concept of using debt as a tool for wealth creation. Additionally, if the market conditions are not favorable for HELOC terms or if real estate investments do not align with one’s risk tolerance, pursuing this strategy could lead to financial strain.

Example in Action: Alex’s Journey

Alex discovered that by using a HELOC against his primary residence, he could make lump-sum payments toward his mortgage principal, thereby reducing the amount of interest paid over time and shortening the loan’s lifespan significantly.

  • Initial mortgage: $300,000
  • Mortgage interest rate: 4%
  • Monthly mortgage payment: $1,432
  • Mortgage Term: 30 years

If Alex paid his minimum mortgage payment for that full 30-year term, he would end up paying $215k to the bank in interest fees. However, in those first 5-years, that interest is the heaviest. This is in addition to the $300k of capital he’s paying for the base mortgage. This means Alex will pay Over $515k for his home. 

When Alex realizes how much capital he’s paying the bank for the privilege of spreading out his payments, he begins to think about what he could be doing with that $215k instead of paying the bank. Alex decides to explore what it would be like to pay his mortgage debt down quicker, in just 5-years.

If Alex pays off his mortgage in 5-years, he’ll only pay the bank $32k. That means he’ll get to keep the $183k difference. 

Alex embarks on an aggressive plan to leverage his HELOC to pay down his mortgage rapidly, aiming to be debt-free in just 5 years. While he knows that he could simply make higher payments, and do this over time. He knows that having an automated system and a community of other home-owners seeking the same type of freedom will be incredibly helpful along the way. He joins the SHRED community to keep him on track and make the process more fun and manageable.

Utilizing a HELOC Effectively

A HELOC allows homeowners to borrow against the equity of their home. It’s a revolving credit line, similar to a credit card but with the home as collateral.

Alex applies a $60,000 HELOC lump sum to his mortgage principal in year 1, significantly reducing his interest payments and loan term.

  • HELOC Amount Utilized Annually: $60,000 applied as a lump sum to the mortgage principal.
  • HELOC Interest Rate: 5%
  • New Mortgage Balance: $240,000
  • Interest Savings: By reducing his mortgage balance with a single payment, Alex has saved himself $102,766 in interest payments. This is the equivalent of jumping forward nearly 10 years in his mortgage schedule.

In years 2- 5, Alex continues to draw down $60k/yr to pay down his mortgage balance all the way to zero.

  • Annual HELOC Draws: Continues to draw $60,000 annually to apply towards the mortgage.
  • Strategy: Alex uses a combination of savings, cash flow from other investments, and his regular income to replenish the HELOC, allowing for annual lump-sum payments towards the mortgage.

The outcome:

  • Mortgage Paid Off: In 5 years, Alex has successfully applied a total of $300,000 towards his mortgage principal through strategic HELOC draws.
  • Total Interest Paid: Dramatically reduced compared to the original amortization schedule. He will only pay $31k in total interest to the bank. The rest, goes back into his pocket (or his investments).
  • HELOC Interest: Additional cost factored into the strategy includes the simple interest of a HELOC loan, but the overall interest saved on the mortgage outweighs the HELOC interest expense. We’re talking hundreds of dollars versus hundreds of thousands of dollars. 

Reinvesting Savings into Passive Real Estate

The funds saved from reduced interest payments and the growing equity from Alex’s home are reinvested into passive real estate investments, diversifying his portfolio and generating additional income streams. That HELOC will grow, allowing Alex to use the equity in his home to invest. He’ll also free up significant annual income in 5-years to begin using to invest, rather than waiting for 30-years as he pays high interest to the bank.

With the equity built from his home and savings from the SHRED method, Alex invested in a real estate syndication, offering him a hands-off investment opportunity with steady cash flow and potential for significant returns.

Becoming Debt-Free

The ultimate goal of the SHRED method is to eliminate mortgage debt rapidly, thereby freeing up more capital for investment and reducing overall financial risk. It comes down to math and playing the bank’s own game. This should only be undertaken by individuals who have extra income every month, and can follow simple prompts on the software within the SHRED method. If embarking on this process on your own, it is helpful to keep detailed track of where your payments are coming from to be sure that there are no missed loan payments.

The SHRED method, coupled with a strategic use of a HELOC, offers a powerful avenue for homeowners like Alex to not only pay off their mortgage early but also to harness their home’s equity for wealth-building through passive real estate investments. This approach exemplifies how thinking outside the conventional financial planning box can yield remarkable results toward achieving financial independence.

 

To learn more about real estate investing and syndications, reach out to us at https://investwithspark.com/contact/ today!

 

 

 

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