Save cash earned for CapEx, or use to pay down loan faster

[Ronald H.]

Hey everyone! I am completely new here and this is my first post. So, I am very “green” in real estate investing.

Here's my question: should an buy-and-hold rental investor save money allocated for Capital Expenditures in the bank, or use that money to pay down the loan more quickly? The reason I ask is because I had the thought that an investor could just get a HELOC to pay for CapEx when it occurs. Plus, paying down the principal faster will lower overall interest paid.

Is this the right train of thought, or is this a rookie mistake?

[Joe P.]

I'd also consider a CAPEX budget to be "building over time". Year one, if you setaside 2k and don't use any of it, then that is your setaside moving forward. If you go 10 years without any CAPEX, your CAPEX budget is now $20,000. That's not investment money. That will go to fixing the problems with this property that invariably will come up.

Just because you don't have any CAPEX this year, doesn't mean your roof won't need replacing, your hot water heater won't die, or your appliances last forever, or you need a new shower/tub/toilet, etc. Those items are degrading by a tiny percentage daily...so be prepared by having the CAPEX for it over time. The last thing you need to do is take your CAPEX budget and invest it into something, and then have to dip into personal funds or a HELOC because you robbed Peter to pay Paul.

One way you can avoid all of this...and a mistake I made and tell people whenever these posts come up...is to have a healthy budget set-aside already for each property as a "deferred maintenance" catch-all. Make it 10 to 15k, if you can, and include it in your property evaluations. This way you've got the funds set-aside from the get-go and if you don't have any significant CAPEX, that could be invested.

People do a nice job of leveraging available funds for their investments, and if you can take them, use them. I personally want to stay away from over-leveraging myself, my primary residence, or even my investment property, unless it was for a project to bring in more income. A HELOC to pay down debt incurred from fixing a property seems like correcting one mistake with another mistake.