HELOC or Refinance on Second Investment Property?

Question

Hi,

I bought a triplex back in 2017 and the property has been doing really well. So, I am now ready to get my second investment property (preferably a multi). However, I prefer not to use my own out of pocket money to fund the next down payment if I don't need to. I bought the property at $700,000 and now it roughly valued at $970,000. I have a conventional loan of $500,000 on this property. To fund the down payment of the second investment property (I don't have one in my mind yet, but just wanted to have the cash ready for down payment if I do come across one), I was thinking of doing a HELOC from my triplex. What do you guys think? Is now a good time? I thought about doing a cash out refinance but interest is way too high now, and with the existing $500,000 loan, the payment increase would be really significant. Any other options?

Andrew Postell · Answer

@Miko Lee the basic premise of a HELOC or LOC is like a credit card.  It has a limit, you can access cash when you want.  You pay interest when there is a balance.  When you pay it back, then you can pull money from it again.  Usually, it's people who flip that use these products like crazy.  Other people use them too but with flippers they buy a property with their LOC, pay that balance back when they sell the home, then use the LOC again to buy another property.

You can absolutely use a HELOC or LOC for your downpayment....just keep in mind that you will have a variable interest rate on it.  So if it adjusts higher.....well, it might be bad.  So just have a plan to pay it back and you will be in a good spot. The HELOC is great if you just want access to money when you need it.  That way you don't pay interest on it until you use it.  Just be aware of the exposure to the variable interest rate is all.  I don't mean to sound like I am talking you out from using it....just be aware of what might happen.

Hope this helps!

Miko Lee · Answer

@Andrew Postell Do you know if I can refinance the HELOC into a 30 year fixed? Is that what your "using it, paying it back, using it again" means? How do people usually do it? If I don't want to use any of my own money, do people just get HELOC for down and then conventional loan for remaining? After 6 months/1 year, then cash out refinance the whole thing to fixed 30 years? Not sure if what I said makes sense since I am new to the scene. I prefer HELOC since I don't really have a property in mind yet. I could use HELOC in a couple months or in 5 years. If I do traditional method (With the high interest currently), then I'll be stuck with higher payment since day 1. Thanks!!

Andrew Postell · Answer

@Miko Lee you could do a standard cash out loan.  That would give you a fixed 30 year rate of 70% of the value of the property.

You could also do a Line of Credit on the property too.  These are harder to find on investment properties though.  It didn't sound like you lived in the property but if you do then you would have tons of banks to choose from.  But for investment properties a lot harder to find that product.  If you want to go that route you should post in the California forum (assuming that's where the property is located) to see if any local people can guide you to a good lender that offers it. I know of one (if you want to PM me I will share it).

The Line of Credit might actually work better but it has some drawbacks too.  So a Line of Credit you don't pay any interest on unless you use it.  So if you don't need any funds for 9 months...then you don't have to pay anything for 9 months since your balance is $0.  The closing costs are normally significantly lower too.

Two of the common areas of concern for LOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

The strategy of using it, paying it back, using it again...that's exactly what those are designed for.  So if you don't have a plan to pay it back the fixed 30 year loan would be superior in that way.  Pros and Cons to them both I guess but I hope this helps with what your options might be.  Good luck!