Sell/Refi/HELOC - Best Way to Leverage Our Equity?

[Colby Willetts]

We are in a situation where we have built a good bit of equity in our current primary residence and are trying to figure out the best method to leverage that equity to continue building our portfolio as fast as possible. (Goal is financial independence mainly via buy and hold rentals)

Basically we purchased a "fixer upper" in early 2016 for $230K. Now that house, as is, comps for anywhere from $370-$410 (per local realtor in the neighborhood). Completely fixed up the ARV would be around $500-525k. We owe around $210K still.

The way I see it we have basically 3 main options, but I would love input from others with much more experience than myself. Perhaps I am not considering something that may be obvious/import from other's perspectives?

1. Sell the house and pocket the proceeds. Depending on the rehab estimate from contractors, we would determine if it makes sense to fix it up first or just sell as is. Then we would take the cash in hand and purchase a primary residence to live in (say ~$50K down payment) and then put a substantial down payment on another buy/hold property to rent out. Possibly pay off some credit cards/student loan debt with any remainder.
2. Cash-out refi and basically do the same thing (i.e. put substantial down payment on another property/pay off debt) . However, the payment would then be so high that I think we would struggle to afford living here still after that. 
3. HELOC and use that for the same thing.

We love the location/neighbors, etc. and like the house (particularly if we did the full rehab). So options 2 or 3 are appealing in that sense, but I am trying to figure out if either of those would make sense given that the monthly payment would go from $1,450 to probably around $3K or more, making it a) hard to afford and b) even harder to save/grow our portfolio. Not sure that renting it out would make a lot of sense as its mainly a higher income/family area and, for whatever its worth, the "rent zestimate" is $1,650/month. With this being an older house with lots of little issues/needed upgrades, I worry that renting could be an issue without first making several updates. 

We do not have kids, so are not tied to this school district or anything like that.  

Looking forward to hearing everyone's thoughts on this. I appreciate the feedback!

[Charles Kao]

@Colby Willetts You said build your portfolio so I would do what gives you the best return on cash which would be a refinance while rates are low. Those funds for your down payment won't get paid off soon if investing in a rental or another house so its long term debt which would need a longterm strategy to manage. If you LOC and then need to lock rater later it will be much higher rate. If you want to flip I would do an LOC. If you were to sell I'd only sell if you can qualify the sale for tax exemption or lessen the tax burden.

[Charles Kao]

@Colby Willetts You said build your portfolio so I would do what gives you the best return on cash which would be a refinance while rates are low. Those funds for your down payment won't get paid off soon if investing in a rental or another house so its long term debt which would need a longterm strategy to manage. If you LOC and then need to lock rater later it will be much higher rate. If you want to flip I would do an LOC. If you were to sell I'd only sell if you can qualify the sale for tax exemption or lessen the tax burden.

[Colby Willetts]

@Charles Kao Thank you for your reply. My main concern was that with a HELOC I would not want to carry the additional payment for a long time, so maybe investing in a flip or something that would allow me to recoup the cash within a relatively short period of time would be most beneficial?

Say I used a HELOC as the down payment for another rental property. Assuming it cashflowed at least enough to cover the PITI, plus the HELOC payment. What would be a good exit strategy knowing that the HELOC payment would increase substantially once the interest only period ends? Perhaps, plan to refi again at that point and pay it all back? I would worry about the potentially much higher interest rates though.

Regarding the tax implications, since we have lived here long than 2 years, I don't believe short term capital gains tax would be applicable at least. 

Apologies if I am being naive or not realizing some things that may be obvious to others. Currently, I just have my one other SFR and want to soak up all the advice I can get from everyone here who have lots of experience with these types of investments/financing.

[Charles Kao]

@Colby Willetts I like short term debt for short term strategies like flipping but long term debt for long term strategies like buying rentals. The exception would be if my HELOC is big enough to buy a propery cash where I can pay it off with a refinance with is a better deal because cash offers normally get better deals and refinances are slightly better rates and terms. If you HELOC and use the money for a downpayment when do you get the money back to pay it off? Either way there is a refinance so you would be looking at doing an extra loan. Also HELOCs can get shutdown fast if markets correct where as a fixed mortgage they can't undo the debt.