save cash or pay down HELOC ?

[Jeff S.]

I'm working on my first deal to buy a duplex using HELOC for down payment. I'm wondering what to do with the cash flow: what is the best stategy for preserving my liquidity ?

My first idea is to just pay down the HELOC as cash comes in. Whenever I need cash for repairs, or when I'm ready for my next deal, my equity is there and I can just draw on the HELOC again.

But if the market turns south, that equity can rapidly disappear, and the lender can shut down the HELOC in a heartbeat. Goodbye liquidity.

So my second idea is to build up my cash reserves and only make minimum payments on the HELOC. As long as I have the liquidity to make all my payments, I'm fine. But where's a body to park their cash safely and earn anywhere close to the 4-5% I'm paying on the HELOC. ?

So let's hear it : what's your advice for a small-time buy-and-hold investor? Where do you park your cash? 

[Logan Drew]

The conservative answer is pay down the HELOC when you can and as soon as you can as it will cost you more than the cash will yield... and as you said, you can go back to the HELOC and draw again as needed. The Prime Rate will be increasing soon and steadily which would also point to paying your balance down asap as the best option. You're better off being ahead of the curve on paying your balance down. That said, liquidity is also expected to increase at least slightly in credit markets in the near and mid-term, so having your line limit reduced might not be as much of a threat as it would have been in recent years.

If it were me, I'd err on the side of caution and pay the HELOC down as much as possible while keeping my eye on the creditor/ my limit for future needs.