Cash out Refi vs HELOC?

[Daren D Wagner]

This may be the type of question a few of you may call me an idiot for asking, but give me some slack here, this is my first ever investment property.  

I have been searching around Bigger Pockets and asking friends/coworkers and cannot get a good straight forward answer to this question.

I am in the final steps (and paperwork) for buying a duplex using cash. I want to use that property to not only generate income but also leverage the equity in it to buy another rental property. I am very new to investing, but my decided niche (for now) will be buy and hold small multifamily homes. I want to know what people think on either pulling a HELOC on this home (I will not live in it so a 70% value is best I can get) or doing a Cash Out Refi on this home. Here is where I struggle. If I do a Cash Out Refi the monthly payments would be higher than a HELOC. The money saved on the HELOC allows me to build more capital for another purchase at a higher price point faster (and having less debt). I also like the idea of not being locked into a principle+interest payment each month (in-case of vacancy). A Cash Out Refi should offer me more cash up front allowing me to buy at a higher price point right away, but down the line I am worried about issues of holding more than 4 mortgage loans and the increased cost of a portfolio lender. Any ideas/advice?

[Arlen Chou]

@Brian Garrett neither a refi and a HELOC will give you 100% of the value of your home. How much you get out will depend on your lender. In both cases you will have the cash before you find your property. However, the big difference is that for the HELOC you only need to go through the qualification process one time prior to purchase. You can reload it at your own pace and not have to worry about additional loans PRIOR to a purchase.

As an example: I pulled a "first position" HELOC on my primary residence wrapped with another property. This gave me a loan amount that paid off my primary AND also gave me enough to purchase a 6 plex. The income of the 6 plex pays down the HELOC at a faster rate then my original 30 fixed rate. Essentially moving the entire loan of my primary to my new rental building. Keep in mind that the new property is cash flow positive AND I still get the home owner tax deduction because the HELOC is on my primary.

After re-positioning, I am now in the process of looking for a stand alone commercial loan for the rental. I will pay off the HELOC and have that money available for the next purchase. At that point, with the HELOC active loan amount at zero, I will have taken all of the loan off of my primary residence, but have access to a large amount of essentially tax free money to use on renovations or additional rentals.

At this point, there is no pressure on me to find a deal, find a loan or make any hasty decisions.  Additionally, my loan on my primary is gone, I have positive cash flow and I still get the tax benefits...