Cash out Refi vs HELOC?

Question

Hello! I have a two-part question if anyone has any tips or tricks that would be greatly appreciated!

First question:

I am trying to figure out how to grow my "snowball" as a real estate investor. I currently own two rental properties. I am trying to figure out the best way to get more funds for the next homes. I have approximately $150,000 in equity in one of my homes and do not know if it is more beneficial to cash-out refinance or to get a home equity line of credit on the home to apply to more properties. I am hesitant to refinance because I have a 2.6% interest rate on the home but at the same time the HELOC is a variable rate. Anyone been faced with this same cross road or have any tips on what might be the better option?

Second question:

What is a good cash-on-cash return on a single family rental home that seasoned investors try and aim for? Do you aim slightly higher to give yourself a little extra safety cushion?

Thank you for any responses, it is a ton of help!

Brandon

Lucas Miles · Answer

@Brandon Knight If you have a interest rate locked in at 2.6%, I would definitely not refinance. A HELOC seems like they way to go in your situation, banks often do HELOCs different. But very common is to open a "line" of credit based on your equity. To determine how much equity you have you might need to have a new appraisal done to confirm this equity (bank specific and situation dependent). Often banks will let you keep this "line" open until you need to use it. After this line established, once you find a property to purchase you can transfer the money over and use it for a down-payment for example.

COC return is highly dependent on your area, type of investing, goals, etc. Many SFR investors with do the BRRRR strategy to pull out their initial investment, at this point your return is effectively infinite.

Andrew Freed · Answer

@Brandon Gale - Great question! If I were you, I would not touch a 2.6% 30 year fixed interest rate on the majority of the loan. I would absolutely recommend utilizing a HELOC. HELOC's are fantastic for buying properties because you can leverage the HELOC for the 20% downpayment with conventional lending so a majority of the loan will be fixed 30 year loan.

What I would recommend is working to pay off the HELOC as fast as possible. In this high inflationary period, it is to your benefit to pay off that balance as quickly as possible rather than have the high interest rates creep up. Some other things I like about HELOCS are below:

1. No closing costs and usually appraisal is covered.

2. You can select interest only first 10 years then P + I. This has huge affects on your DTI since the interest only payment is taken into account and it excludes the principal payment.

3. Open line you can grab from without any questions asked

4. Allows you the opportunity costs of having access to large capital without sitting on a pile of cash and losing it to interest.

Overall, I think HELOCS are one of the best tools in real estate and I plan on opening one on every primary I live in for future use.

Tina Wicks · Answer

Hello,

You just described my situation and my thoughts also.  We have lots of great mortgages on our rental properties that are in the low 3s for interest rate.  I hate to touch them but I want that equity to grow.  My issue is that I have them all in a LLC and have not found an institution that will do a HELOC on a property in a LLC.

But enough of my situation.  I agree with the other posts.  Don't refinance, get a HELOC.  We have a HELOC on our personal home as it is paid off and we are constantly using it to fund BRRRRs or secure a property and then refinance and get a cash back.  The approval process and costs for a HELOC are quite simpler and lower than a traditional cash out refi.

Good luck with your investment journey.

Brandon Knight · Answer

Thanks for the information, Andrew. I like the idea of using the HELOC as my "bank" to fund BRRR projects and then pay off the line of credit each time I refinance. Finding one that offers an interest-only payment for a certain period of time seems like an advantage to keep your payments low until you can hopefully refinance and make enough equity to pay it off in full.

Brandon Knight · Answer

Thank you Lucas for the information. I agree, I think the HELOC is going to be my best bet. Also love the BRRR idea of paying myself back after refinancing. Seems similar to the "infinite banking" idea.

Cash out Refi vs HELOC?

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