Apartment Reno's - Line of Credit

[Stephen E.]

We are about to start on our first renovation of a rental apartment. We are replacing bath & tub, refacing kitchen cabinets and vanity, and putting in all new countertops, sinks and faucets. Finally we are replacing all carpeting and replacing linoleum with ceramic tile. Our estimated costs for this work are $10-12k all in.

I have operated our business in a relatively conservative manner to date. We have 20% downpayments, fixed rate mortgages, and repayment over 20 years. For renos the choice is to pay cash or use a credit line. Paying cash takes a bit less than half a downpayment on a rental unit in our town, putting our business plans behind. Using a line of credit at 4% means interest of only $400 on a $10k loan. In exchange we get a redone unit that we think we can get additional rent of some $200/month or $2,400 per year. So we clear $2,000, which is a good deal.

The problem is I have been relatively risk averse in growing the business. We have not refinanced any units for cash out yet and in any event are inclined to leave equity in place to pay down units and have them owned free and clear by retirement. I know that it may be more lucrative to constantly lever up and buy as many properties as possible, but I think I have management time constraints and about 12 units would be my max. So steady, equity driven growth seems to suit our style.

Which gets back to the renos - line of credit or cash? As I write this I am thinking it makes pretty good sense to use the line of credit and preserve cash to have a downpayment on another property. We could then just cover interest or pay down, perhaps over several years. There will be other reno projects and we could do things this way as well. But I wonder what other BP members think:

Would you use a line of credit or prefer to use cash for reno work?

If you used a line of credit what repayment term would you aim for?

I am fortunate in that I have a high income and can produce enough cash for a downpayment on a property a year relatively easily. A line of credit would make the difference between getting one or two units this year, and at say appreciation of 3% on a $120k property I would get $3,600 in appreciation, plus cash flow of approx $2,000, plus mortgage paydown.

Which sounds as though I am talking myself into use of a credit line to speed up property acquisition. The debt is relatively small but would lead to others as if it makes sense to renovate one on credit, it makes sense to renovate the others on credit.

So over to you, fellow landlords. Do you use credit to finance renovations or do you prefer to pay cash to keep leverage and interest rate risk lower?