Smart Debt Strategy for Real Estate Investors | Use Home Equity to Scale Faster

Howard Polansky (00:00)
biggest risk in all of this, Cody, the biggest concern that I have in sharing this with people is if you raid the piggy bank. So I’ve got an acquaintance and I use that term very loosely. At one point, they were part of the watch of the month club and they had a car lease payment of $1,300 a month.

Cody Crabb (00:08)
Hmm.

Howard Polansky (00:21)
Now the family does just fine. I could care less what they spend it on. But if you got them in a corner and you ask them why, why do you spend on some of the stuff? It doesn’t take long to get to the truth, to impress our circle of friends. And see the problem with that is that there is no end game to that.

Cody Crabb (02:15)
Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel and today I’m joined by Howard Polansky founder of Financially Led. Howard specializes in helping high income professionals, folks like dentists and people like them optimize their cash flow so they can invest in stuff like real estate. Instead of just focusing on earning more, he helps people unlock money they’ve already got access to and help them put it to work. So Howard, thanks so much for joining us today. We really appreciate it.

Howard Polansky (02:45)
Yeah, thank you, Cody, for the opportunity.

Cody Crabb (02:48)
Sure, so let’s just diving in right away. I’m curious, when you say optimize cash flow, what does that actually look like in real life?

Howard Polansky (02:57)
Yeah, so the way that I first focus for people in terms of looking at their personal finances or if they own a business is looking at their fixed debt payments and saying, is there a way for us to rearrange how we’re paying those off so that that payment that’s going out every 30 days is now gone sooner, faster, more efficiently so that that money that’s

been going out now stays in your pocket.

Cody Crabb (03:30)
Hmm. So when someone comes to you and you’re working with them, what is typically going on financially with them? Like what’s their situation?

Howard Polansky (03:39)
Well, most of my clients are dentists because in my past life I was a dentist. So they have student loans, a lot of student loans. They’ve got a mortgage, they’ve got cars, they’ve got a practice loan, they’ve got dental equipment that they’re financing. And so, yes, there might be a lot of money running through their practice, but there’s a lot of expenses going in all sorts of places. And frankly,

Cody Crabb (03:50)
Sure, yeah.

Howard Polansky (04:07)
and I’m making a very broad stroke about most healthcare professionals, they have no idea where the money goes. And so, I’m… Well, and you have the doctor lifestyle and the doctor stigma in terms of having to live up to this lifestyle, but then they just have no idea what’s happening. And so it starts with just tracking.

Cody Crabb (04:14)
Well, yeah, they’re focused on the other stuff. Yeah, I see what you mean

Howard Polansky (05:21)
then seeing where I call it the money boulders, which is those debt payments and saying, you know, yeah, you’ve probably done very well. You probably have some assets that have appreciated. And can we utilize these assets like a multifunctional tool, something like a house and getting a home equity line of credit to be able to play this arbitrage game to get rid of that fixed, let’s call it a fixed car payment.

swing it into the line of credit. Now, all of a sudden, the payment comes down. Now you have more money.

Cody Crabb (05:55)
Okay, so let’s frame this in a way that our real estate investor audience could maybe take advantage of it. You mentioned arbitrage. Can you just kind of break that down for me in simple terms? We get people across the board in terms of experience here, so I like to kind of keep it simple for those starting out.

Howard Polansky (06:13)
Yeah, absolutely. So let’s start with thinking if we were a bank, okay, we own a bank. We’re trying to get people to deposit their money in our bank. So we might say, hey, we’ve got a savings account that you can earn 4%. All right. Now from you have to remember from a bank’s perspective, that’s a liability. It’s costing us 4 % for that for you Cody to keep your money with me.

But what do I do? I’m taking your money, turning around, and then giving you a mortgage at six and a half percent. That difference between four and six and a half, that’s the arbitrage. Okay. Also known as a spread. So now let’s take this concept. We have this line of credit. We have this availability of cash that we can use, that we can invest in a real estate opportunity.

Cody Crabb (06:57)
I see, okay.

Howard Polansky (07:14)
but it might cost us 8%. So it would only make sense to do this if we’re borrowing at 8%, but we can earn 10, 12, 15 % and make the positive spread in our favor.

Cody Crabb (07:31)
Hmm, interesting. Okay, so this is kind of interesting way to look at it because ⁓ from this perspective, it’s like the risk is so much lower for the people that are actually doing the investing.

Howard Polansky (07:45)
Hopefully, yes. this is why I tell my clients, there’s no reason to rush because at worst, as we’re paying down this debt, it’s a guaranteed cash on cash return. But when you do find an opportunity where you’re like, my God, this is a slam dunk, where do you get the money from? You pull it.

Cody Crabb (07:47)
Yeah.

Howard Polansky (08:13)
out of the line of credit. But most importantly, they know how to pay themselves back. So it’s one of those you’re waiting for the opportunity, you can deploy quickly, and then you know how to reload or restock to find the next opportunity.

Cody Crabb (08:29)
Gotcha, okay, so someone, like I said, we’re keeping this in terms of real estate investors. let’s say a real estate investor is looking at ⁓ how can they use this framework, kind of line of thinking when they are ⁓ looking at a deal or looking to ⁓ expand or anything. I’m just kind of trying to put it in terms of where maybe it’s more applicable, you know?

Howard Polansky (08:52)
Sure. I mean, when you say a dealer, I just want to be clear. Are you talking about like a single family home or more like a syndication?

Cody Crabb (09:02)
Either one, but let’s just put it in terms of like a single family home. Just for the ease of the example.

Howard Polansky (09:06)
Okay.

Yeah, so it’s one of those that let’s just say, you know, the normal market rate is $250,000 for a house, but you find a house available for 180. You know, there you’re going to have to put some elbow grease into it. OK, but you have set yourself up with $150,000 home equity line of credit. Well, what can you do? You can pull that money out of the HELOC.

and use that as a down payment to purchase this new home, spruce it up, and then from the rent and the cash flow from that, then you can start to pay it back. And you now have the second asset, which hopefully you have a forced depreciation. And eventually with the right bank, we’re in Texas, the rules get weird.

But with the right bank, we can get another line of credit on that new single-family home.

Cody Crabb (10:43)
Gotcha, okay. So if someone wants to start kind of freeing up capital, what would be like the first step in order to do that?

Howard Polansky (10:52)
The first step in my mind is to start looking at your fixed debt payments and saying, it’s not in terms of the Dave Ramsey of the highest interest rate or the biggest balance or the smallest balance. I don’t care which one that is. It is what is the highest payment compared to the balance remaining? So, and here’s what I mean is imagine that you have two

two debts, they each have a $500 monthly payment with them. But one of them, the balance remaining is $8,000. And the other one, the balance remaining is $80,000. If you could only pay off one, Cody, which one would you pay off first?

Cody Crabb (11:42)
instinct tells me the lower one.

Howard Polansky (11:45)
Right. Okay. Because it’s a smaller balance compared to the size of the payment. And so this is the way you start to arrange your debts is look at payment compared to balance, figure out which one of those is going to give you the best bang for your buck or the best cash on cash return, and then compare that to what is out there in the market. And if it makes more sense to

invest in the debt and pay that off, go for that first. But once you find that opportunity, go for the opportunity.

Cody Crabb (12:24)
Gotcha. This is a good way to start thinking about things because real estate investors specifically always have a few different … They probably have multiple sources of debt that they should be looking at. That’s a really smart way to look at it. I’ve never really thought about that before.

So what’s a way that this can go wrong? mean, what situation should someone not think about ⁓ their money this way? ⁓ I know that obviously every situation is unique, every situation has their own pros and cons and things, but I’m curious, like, the way that you’re viewing this seems like there could be a downside. I’m curious if you see one of those.

Howard Polansky (13:48)
Yeah, I mean, specifically around lines of credit, I say that there’s four big risks. One is your income has to be greater than your expenses. If not, this will not work. It’s just math period end of story. Number two, people get scared about a line of credit having a variable interest rate. But when you understand the whole strategy in terms of utilizing all of your income and not just trying to pay the minimum payment, it’s not that big of a deal.

Number three, lines of credit can get closed. And this is the reason why I don’t like working with the megabanks. Mace Bank, Hell’s Cargo, Crank of America, Capital One. Stay away from them because they’re the megabanks. And when they make a change, it’s going to sweep nationwide. It’s not really looking at your specific situation. Versus community banks, regional banks, credit unions.

They’re much more lenient provided you’re being a good steward of your line. But the biggest risk in all of this, Cody, the biggest concern that I have in sharing this with people is if you raid the piggy bank. So I’ve got an acquaintance and I use that term very loosely. At one point, they were part of the watch of the month club and they had a car lease payment of $1,300 a month.

Cody Crabb (15:01)
Hmm.

Howard Polansky (15:14)
Now the family does just fine. I could care less what they spend it on. But if you got them in a corner and you ask them why, why do you spend on some of the stuff? It doesn’t take long to get to the truth, to impress our circle of friends. And see the problem with that is that there is no end game to that.

So if I showed this couple how to try and do this, they would start it. They’d raid the piggy bank. They come back to me and say, Howard, this doesn’t work.

not just look at them and say, no, you’re just an idiot. You’re an idiot that happens to make a lot of money, but you’re still an idiot. And so if you intend to use this to just up your lifestyle, please don’t even begin with this. If you’re looking to do this to strategically leverage assets, but you have the diligence and you have the wherewithal to say,

Cody Crabb (15:50)
You

Howard Polansky (16:13)
I understand debt is leverage. And I also understand leverage can go badly.

and be smart with this, it can work extremely well in your favor.

Cody Crabb (16:26)
Yeah, sounds like a great way to frame this. ⁓ Howard, thanks so much. I think something like a little, just a little change in how you think about something can completely change the outcome sometimes. ⁓ Think about the money they have already before you go chasing new things and things like that. if anybody wants to connect with you or learn more about what you’re doing, where can they go online to find you?

Howard Polansky (16:54)
Yeah, financiallyled.com is the best way to best place to go.

Cody Crabb (17:00)
All right, sounds good. Well, Howard, thank you so much again for joining us and our audience of real estate investors. If you in the audience found this helpful, and I’m sure you did, go ahead and hit subscribe on our channel so that you can get notified of future videos. And make sure you are subscribed to us on Apple Podcasts and leave us a review as well. Thank you so much. ⁓ Howard, once again, appreciate you coming on and we’ll talk to you next time.