Using Heloc for BRRR? Exit strategy

[Tucker Long]

Hope everyone is staying warm! Hoping to get some advice...

I own my primary residence free and clear, preparing to pull out equity to invest. I feel inclined to just cash out with 30 year fixed since rates are trending up, but do want to be sure HELOC isn't a better option before committing. I realize if I'm not constantly deploying the capital, there's a chance I'll pay more in interest with the 30% even at a lower rate. Property will appraise around $240k, planning to go 80% ltv if I go cash out option.

My objective is to continue building a buy and hold portfolio using BRRR (real creative, I know). I do have income from day job, so there may be situations where I buy something closer to turn key that flows, but I would need to leave some equity in the deal. In general, I'm conservative financially and don't want to leverage my investments over 80% ltv.

So, what I'm wondering is those who have purchased cash flowing properties without a ton of upside with HELOC cash, were you stuck with that 20% equity you have in the deal (or whatever % you put in) in the HELOC balance? Do banks that require you keep X% in the deal even allow you to use equity that came out your home, via a HELOC?

Thanks for any wisdom,

[Nathan Holsather]

I would recommend doing the HELOC over home equity loan. Here is why.

HELOC - (Home Equity Line of Credit)

HELOC is a revolving line of credit. Yes, the interest rates may be slightly little higher and there may be a variable rate, but in the long run it is worth it in my opinion. Here is why.  Say you apply for a loan to get money for a down payment on a rental property. Yes you approved for a line of credit of $70K. You make an offer on the rental property, but someone beats offer and you lose the deal.  With a HELCO you still have that that line of credit with no payments required, because you never used it giving you time to find another property without having to make immediate payments that you may not be able to afford. 

If you are good at managing money HELOC also allows you to interest only payments allowing flexibility increase cash flow. If you are in the position to pay principal as well go for it and it increase your credit line so you buy another property.

Home Equity Loan:You can usually it on a 15-20 year term with lower fixed interest rates 5 years of that will be fix and after the 5th year they can go up based on the market. One thing to know is that second home equity loan money is deposited into your bank account you are making payments on the loan weather you are using it or not.unlike the hELOC where if you don't end up using it your not making payments. . Every time you make payment on the loan you are lower the amount of money you owe which is nice, but at the same time your lowering the amount of money you have for a down payment on the rental property.  And once you pay down on the loan the money is applied to the loan and you no longer have access to the 

I need to mention. The reason, I have this opinion is because I had a Home Equity Loan in the past. It all worked out in the long run for me, but if I did all over I would have done a HELOC.

There are pros and cons to both and in the end you have to do what works for you. Hope this can shed some light on both side of the coin.