To use home equity or not...?

[Jonny Morris]

We bought for about $363k. Put down 80k on the house to avoid mortgage insurance. We have now put about 50k into developing an apartment above garage as our "1st property" rental. The area is growing so I assume it will have risen accordingly with our developments. Recent city valuation puts house value about 60k+ from what we bought at. Question: I would like to use equity from our home to pursue a second investment. My wife sees this as a second mortgage. Any advice, numbers or light anyone can shed on my scenario?

[P.J. Bremner]

@Jonny Morris

It's a good strategy for sure, one that I employ, but she also has a good point. Perhaps it makes sense to get the best of both worlds: Pull a HELOC instead of a cash out refinance. With a HELOC, you have no extra expense (some HELOC has annual fees, but they are low - like $100 - $200 at most which is negligible) unless you actually pull the cash out. The instant you pull the money out, you have "a second mortgage", but you also have an investment that will pay the mortgage so the net result is positive. If you pull a second mortgage (cash out) and you have no deal to use the money on, she is absolutely right: you have a second mortgage.

Explain to her that with a HELOC, you have no second mortgage until the deal comes up. When the deal arrives, you will ONLY BUY DEALS THAT PENCIL OUT and the deal will pay for the HELOC, effectively negating the "second mortgage argument". The HELOC gives you lots of flexibility without rushing you into a deal (every second your money sits in the bank, you're losing ROI).

I have a $110k HELOC that I keep in reserve for when my liquid cash runs dry. I also have a $90k business line of credit (BLOC) for when the HELOC runs dry. It's all about layering yourself so that WHEN the deals come, you can capitalize on them (no pun intended). If I were to take equity out in the form of a cash out, I would be paying another mortgage with no immediate deal to put it to use on, effectively losing me money.

I hope this helps!