HELOC to buy all cash OR 30yr conventional with crazy high rates?

Question

Hi Folks!

New to real estate investing. My lender told me that the rates changed again this morning (80 basis points), so looking for recommendations here on which option is more sensible - using HELOC to buy all cash OR one of the below loan options?

Purchase Price: $170,000

Option 1: 20% Down / Loan Amount $136,000.00, 30 YR FIXED

6.00% charging 1 point or $1360.00

5.500% charging 2 points or $2,720.00

The breakeven point between the two options is 2.7 years or 33 mortgage payments.

Option 2: 25% Down / Loan Amount, 30 YR FIXED

5.750% w/o points

4.990% charging 2 points or $2,550.00

The breakeven point between the two options is 3.5 years or 42 mortgage payments.

Option 3: Use HELOC funds to purchase the property all cash with %2.55 interest only

With this option, I can always refinance when the interest rates get better in the next couple of years hopefully. However, on the flip side, this limits my ability to buy more properties.

Thoughts or recommendations?

Thanks!

Matthew Paul · Answer

Those " crazy high rates "  of 6%  are nothing  . Back in the 70's you were paying north of 15% .  I would use your HELOC to aquire the property and then finance ASAP .  No one can say for sure rates will EVER be this low again . In 2 years 6% may look like a bargain .  I have had loans at 13%  , 11%  , 6% , 4 and 2,75 % .  Everyone of my deals cash flowed . Even back then .

It goes back to the old saying " You make your money when you buy " .  If you dont buy right , the interest rate doesnt matter .

Stephen Dougherty · Answer

I wouldn't do the HELOC if you plan on holding the property long term.  Short term (<2 years) then yes I would do the HELOC.  Interest rates are only going up and I would rather lock things in now than be stuck with a HELOC with an interest rate that keeps rising.  The choice between the other two conventional loan options will largely depend on cashflow, reserves, and your other assumptions/goals with the property.  Good luck.

Bruce Woodruff · Answer

Interest rates are not high now (historically). I bought my first house when they were >15%. The deal worked out fine and I made a lot of money.

It really depends on the specific property and the value that it has. Will it bring you a high ROI? High Cash Flow? Do you expect it to appreciate hugely over the next few years?

If yes, then it really doesn't matter much what your rate is.....

Larry Turowski · Answer

@Akshay Wattal the best move you’re making is getting started, especially while your young. The lessons you learn will far outweigh these “minor” differences in the long term. You want to get it right but you don’t want to wait for perfect.

That said, what you consider sky high rates are still historically low. I wouldn’t be waiting for them to come down so scratch #3. And if they do come down, it’s still great.

If you’re object is to grow then you want to conserve cash.  The difference between 20% down and 25% down is the difference between 5 and 4 deals. Your cash flow and ROI will likely be better with 5 deals, so option 1.

And then it comes down to the points. If you’re starting out a little slow and will take 3 or 4 years to accumulate 5 rentals then pay the points for the lower interest. If you think you might get them in the next year or two then conserve the cash.

Malcomb Stapel · Answer

@Akshay Wattal  Option #4, use your HELOC to be a competitive buyer, then refinance at what are still historically low rates, while they are still low. Rinse and repeat.

Harrison Chow · Answer

I would do option 1 without paying down any point if possible because you put the least amount of your own money into the deal. Preserving the capital would allow you to do more deals. It might mean that you have to be a little more selective with your deals. There are out there though. There is a chance that the rate will go up for the next one or two years. The low-interest-rate environment I think is going away for a foreseeable future, but of course, the FED could definitely change their mind. Let me know if you are interested in the Ohio Market, I would be more than happy to bring you deals!

Vincent R. · Answer

If you're considering using the HELOC for an all cash offer, I'd look into putting something like 30 or 40% down. I don't think your interest rate will improve from 25% down, but it would increase your monthly cash flow.

Now... a little extra cash flow (30-40% down) or a lot of extra reserves (20/25% down). The more powerful option is to leverage your money and put the smallest amount down possible. I'd argue (without running the numbers closely) that...  because you have to pay back two loans,  it would be wise to put a little more on the 2.55% HELOC and minimize the amount at 5.5/6%. You might only be able to buy 2 properties instead of 3 (if this is the only money you will utilize) but you are buying equity at a cheaper cost.

Again, I didn't run any comparisons, but it sounds good. 🤣.

Happy hunting and game planning!

John B Clark · Answer

In addition to what the others are saying, you also have to consider how long you plan on keeping the property for that point payoff difference. If it’s going to lower the payment enough that it makes that much of a difference for your cash flow, and you plan on keeping the property longer than that break even number, it’s probably worth it.

Steve Vaughan · Answer

More important than a relatively small rate differences is being able to buy right at all.

A fat Heloc will let you purchase without a mortgage, it's contingencies or 45 day wait ask of your seller.

Without a mortgage in the way, you can pursue odd, not bankable, etc properties quickly with less competition.

Easier to get a refi later than a mortgage going in.  The small rate diff is just a distraction from reality in this market environment. 'Cash' is king.

Akshay Wattal · Answer

@Vincent Roache - Yes, that's exactly the conundrum here, buying equity at a cheaper cost (HELOC) vs minimizing the amount at 5.5/6% (or even not using it). Reading through the posts here is providing me with a lot of clarity. Thanks for sharing your thoughts! :)

HELOC to buy all cash OR 30yr conventional with crazy high rates?

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