Use HELOC to pay cash, or use as downpayment?

[Todd Mobley]

We should have close to six figures of cash in the form of a HELOC soon. A friend and owner of a handful of multi family properties said the best use of the money is to come into a deal by offering cash, rehabbing the place, increasing the value then get a line of credit on the new property to replace the original HELOC (our primary residence), then use the new additional LOC to purchase the next, and so on.

I understand cash has the most buying power, but is that a better strategy than doing a conventional loan with a 20-25% downpayment?

$100K cash could buy 1 small multi family paying cash, or it could buy a larger 500k property using convention loan, no?

Just trying to understand the logic for each strategy.

[Jaysen Medhurst]

Both are viable strategies, @Todd Mobley. I usually suggest that you try to go bigger faster, as long as you're confident in your ability to analyze properties and understand what goes into managing them. If you're still green, might be worth knocking out a couple of $100k properties to get your feet wet and make mistakes in a low(er) stakes environment. Otherwise, scale up! 

Couple of things to think about:

• It makes more sense to put permanent financing on a rental property after renovating and renting it out. A LOC will have higher rates, which are variable, and typically a shorter term (20 years). You pay back the original HELOC with the mortgage on the rental and then the HELOC money is ready to go again.
• If you use your HELOC as a down payment to purchase a $500k property, you should a plan to pay back the HELOC relatively quickly. Either through the cash flow generated by the property, your other earnings, or a combination of both. HELOCs are best used for short-term financing.