What's the strategy for a long-term Buy/Hold investor?

Question

Hi all,

I purchased a rental house back in Dec. at a low interest rate and using a HELOC for down payment and rehab costs. With interest rates rising and those of us with HELOCs with variable rates, what's the strategy that would help a Buy/Hold investor to weather these economy for the coming years? I wanted to do a refi cash-out after my rehab, but that tool 2 months longer than anticipated and the rates are not favorable for me to do that. Besides...I'm not sure I could get what I need from a refi cash-out to cover the mortgage (1st lien) and the HELCO (2nd lien).

Details of the financing below:

Purchase price: $255KMortgage: 3.0% for 30 yearsHELOC: 5% (as of today) for an 10 year interest only paymentRehab costs: $80KMonthly mortgage/taxes/insurance is: $2395HELOC is : $433 (as of today)I have the opportunity to lock in the HELOC rate 3 times in the life of the Loan, but it would up my expenses.Here are my options with the HELOC:1) Interest only – option30 year calculation (360 months)Use the current prime rate, add in your margin 1.5 to get the rate, and only look at your Interest portion to determine your minimum payment

2) Rate lock - optionWill be 20 years (240 months) of principal and interest paymentsRate = current prime rate, + your margin 1.5 + HELOC current lock in margin .75

Please offer your thoughts as I'm sure I should lock in at whatever the interest rate is now, but it would up my HELOC monthly payment to $1050 for 20 years.Thank you

Taylor Dasch · Answer

I am in the exact same boat as you as far as not doing the cash out refi due to a longer rehab time.  You are on a good interest rate. Will the monthly income from the property cover the HELOC and cash flow well? If so, I would hold the HELOC until you can refi at a lower rate. I couldnt find anyone to do a HELOC on an investment property.  Another option is to flip it and use the cash to scale up - this is a little more risky though and you would definitely be locked into a higher interest rate.  If I were in your situation I would hold it until I had the opportunity to refi and pay the heloc back.

Jaron Walling · Answer

@Jay C. What does this property rent for per month? Just curious.

Food for thought. Some people are actively de-leveraging in this climate. I'd focus less on HELOC's or leveraging and more on the numbers that matter for buy/hold. Cash-flow, ROI, predicted future CapEx, reserves, etc.

Jay C. · Answer

Hi Jaron,

That's also my mindset, to focus on the buy/hold strategy. This was an interesting property has it has a mother-in-law-suite so it's currently being rented as well as the house is. The cash flow is $1771 after Taxes, Insurance, mortgage and HELOC payment. It's higher currently due to a 6-month lease.

Jay C. · Answer

Hi Andrew, I'm a buy/hold investor and I plan to hold onto it for a long time. Could you provide your thoughts on how to keep a decent cash flow by keeping the HELOC with a variable rate vs locking in the rate for 20 years?My plan was to cash-out refi to pay off the HELOC, but that will need to take a back seat as the interest rates are not higher than my mortgage and the HELOC. I could also save the cash flow and pay off the HELOC with the cash. I understood that Prime rates don't rise quickly, but can rise slowly in a decade as demonstrated historically.

Andrew Garcia · Answer

Hi @Jay C., the issue with a HELOC is that rates could continue rising so if you plan on keeping it for longer than a couple years, you could end up paying double digit rates.

Option 2 removes that so I would personally choose that option.

Ultimately, it comes down to what your risk tolerance is and what you are comfortable with.

You seem like you have thoroughly thought through both options so I am sure that you will make the best decision.

Hope this helps! Let me know if I can be of any assistance.

Jay C. · Answer

Hi Taylor! The positive is that being in this same boat isn't a sinking boat. :)The property does cash well and I'm thinking I should lock in the rate at 6.25 with my HELOC for the time being, it would up my HELOC monthly payment to $1050, but at least I'm not just paying interest only for 10 years. I'm just not all that excited about taking about $800 from my monthly cashflow to do it. And then the "pay off the mortgage vs cash flow" question comes in....I was able to get a Pen Fed HELOC on our first house we lived in and made into a rental for the past 6 years. That was the only credit union I got to give a HELOC on a investment property. Best wishes on your adventures.

What's the strategy for a long-term Buy/Hold investor?

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