HELOC or Cash Out Refi?

[Jeffrey Swanson]

I am looking to get into my first rental property. My plan is to BRRRR. My question is should I use a HELCO or cash out refi from my primary residence to fund it? what are the pros and cons of each? is one more risk than the other? has any one used a HELOC for investments property before?

[Ben Nelson]

While the above 2 comments definitely are true and something you have to consider (paying debt service without the money being at work), you also really need to consider the rest of the terms as well. Often (but not always), HELOCs can have variable rates. Not a big deal right now with low interest rates, but there's no upside and a potential huge downside if/when rates adjust upwards, which could significantly impact your monthly obligation and cash flow if your money is out at work at the time. HELOCs also very often have the ability of the lender to shut them down at their option. So while you may think you are liquid and have "available capital" on a HELOC line, it may not always be there if the lender decides they don't want the risk of that line being out there any longer. It happened to a TON of people in the 2008 crash, and all the sudden they had zero liquidity when they thought they had plenty.

With a full refi or a fixed 2nd, you know your terms and you’re locked in for the life of the loan. Yes, you’re paying debt service if you’re not using it…so use it (wisely of course)! 

Either route you go, just make sure you understand all the terms so you know what the upside and possible downside is of each so you’re able to make an educated decision based on your own circumstances and risk tolerance.