Using cash vs. HELOC for next investment property

[Ryan Lewis]

Hi BP community - I'm an investor with 3 SFHs in the Nashville area looking to acquire my first small multifamily property (2-4 units).

I'm trying to determine the best approach for the 25% downpayment, comparing using cash that is currently sitting in a high yield savings account to funds from a HELOC on one of my properties. The amount of equity I call pull is less than the cash I have but not significantly less.

When doing this analysis it struck me that it may not be worth using a HELOC for the simple fact that the interest rate is ~9%* while the funds in my high yield account are only yielding ~5%*. So I'd be pulling equity at 9% and only get paid 5% if I used the HELOC and kept the cash in my high yield account.

I recognize there are other ways I could invest this cash (including another property) but I am being mindful of levering myself out too much in the current environment where job losses are more common in my industry (tech). I'll also want to have more reserves available the more properties I have.

Am I oversimplifying or missing something? Or, is it better to look at it on a per investment basis. E.g. - if I use my cash, the investment needs to generate > 5%. If I used the HELOC, the investment needs to generate >9%.

I recognize there are many variables not listed here but would love to hear from more experienced investors on generally how you think about using cash vs. home equity to grow your portfolio in the current environment.

Thanks!

*The HELOC rate and my high yield cash savings rate are both variable so will move with the market. However the HELOC rate will always be 0.75% above prime while the high yield cash savings rate will always be below prime of course...

[Jamie Jones]

Hi Ryan, congrats on the success you've had so far in REI - owning 3 SFR in Nashville is great. How do the numbers look if you use your HELOC? With your current rate being at 9.25% (prime + .75), I have to imagine that eats away a good portion of your cash flow, unless you found a killer deal. For example, if you pulled out $100k at that rate, your interest payment would be $770/mo. Combine that with a 1st mortgage rate likely in the high 7's or 8's, and that's tough to find cash flow.

Maybe look at blending the two? Pulling a little out of the HELOC so you don't drain your savings (and look better to lenders) and then use your savings to fund the rest of the down payment & closing costs.

Definitely agree you want to keep ample reserves as you grow your portfolio. The good news is you can use your HELOC as a safety net, even if you are not actively using the money to fund your growth.