Using HELCO to purchase another property

[Troy Yates]

Hello, new here so this might be basic or stupid. 

I have two STR properties and trying to continue to grow, I was able to secure a HELCO on one of them and was thinking of using it to buy another STR.

The cash flow is there to cover the interest and principal on the HELCO so the added cashflow from having another property would grow my bottomline overall I believe (please tell me if Im wrong). 

I know many say to do a cash out for this but both of these rentals have sub 3% rates so it seems silly to refi now at a 5-6% rate. I have also owned both for less than a year.

So my main question is, is it smart to use a HELOC for this purpose? It would likely take several years to fully pay it back, is this a common strategy for growth?

I have the one HELCO now and would likely be able to obtain another from my 2nd rental as well. As mentioned Im still new and really trying to grow while asking as many questions as possible to be smart in the process! 

Thanks! 

[Nathan Grabau]

HELOC is the right move on a sub 3 rate. One thing that people do not realize is that when you refi into a higher rate, your amortization calendar gets worse too. You actually pay less every month towards principle.

A 200k 30 year loan at 3% will have a payment of 843.21, in the first month, 343 goes to principal 

If you were to cash out 100k, taking the loan to 300k at 6%, your monthly payment jumps to 1798, and even with the higher loan and payment, your principal on your first payment is 298, $45 lower

This is what make's the HELOC a no brainer for me. Even if the HELOC goes to 9%, on interest only for 100k this is 750 a month. When you add the 843 to 750 you get a monthly payment of $1593 total, $200 cheaper than the 300k 6% loan, and you are paying down an extra $45 a month