Cash out Refi vs. HELOC for a buy and hold investor?

[Jake L.]

Sorry for the newbie question but I wanted to confirm with BP that it makes more sense for me to cash out refinance vs. getting a HELOC.

Current situation:

$190K balance on primary residence (Property A)

Fair market value = $400K

3.875% fixed 30 year loan (Year 4)

Goal:

1) Buy another property for primary residence in the next year

2) Convert current Property A into a rental property

3) Would use cash out refi or HELOC (~$80K) to buy 2-3 more buy and hold OOS properties in the next 6-12 months

My rationale for using cash out refinance instead of HELOC

1) Current refi mortgage rate on Property A would be similar to current rate of 3.875%

2) The down payments toward the 2-3 OOS properties will be locked up for at least 5-10 years which makes it harder getting the cash to pay the HELOC down

3) Refinance rates would be fixed whereas HELOC rates are variable and may likely rise in the next 5-10 years(?)

4) The HELOC is for OO properties. Once I make Property A into a rental property, I would risk having the lender potentially cutting off my HELOC, right?

Is my assessment correct or am I missing something? Is there a scenario where HELOC makes more sense for a buy and hold / long term investor?

[Thomas Rutkowski]

I partly agree with @Dave Toelkes. I personally think equity in a house is a waste of money. Every dollar you pay down on a mortgage you may as well have stuffed under a mattress. Equity does not earn an ROI. A house will appreciate whether it is leveraged or owned outright. Its a myth to think you are more secure. Your property taxes and insurance will still be there and those expenses will increase every year as the house appreciates in value. People pay off the one bill that stays level!

So I totally believe in taking as much cash out of a home as you can get. Where I agree with Dave is that I don't think you should risk your house to make risky investments. I stay away from "Equity" investments. I think there are plenty of safe, protected debt positions and private lending opportunities that will create a nice safe interest rate arbitrage on your HELOC.

Think of it this way: if you can get money at 3.5% and you know you can invest it safely and earn 7%, how much money would you want? All of it, right?

I like the HELOC better because most are interest only. I don't want to give the bank their money back as long as I can keep it working in some alternative investment.