Are HELOANs good with rental properties???

Question

I have two houses in Florida with a lot of equity and low interest rates.  I looked at refinancing but the new rates are higher and the closing costs would be high.  I hadn't heard much about a HELOAN but it sounds like I could pull the money out, the combined interest rate between the two loans would be lower and it would still be fixed for 30 years.  The closing costs are also very minimal.  Am I missing something?  Also, I have a cash flow of about $500 per house per month right now.  With this HELOAN, I'm targeting a $0 cash flow but this would free up $140k to reinvest.  Is that a dumb move or a smart way to get more assets?

Alex Breshears · Answer

Hi Brent! I see this question a lot right now because so many investors have low rate mortgages that they want to keep in place.  Before we dive into should you or shouldn't you access the equity, I want to ask you about your overall goals. For example, would 2 properties entirely paid off give you the cash flow you want? Are your goals even centered around cash flow? Do you want to trade up at some point and buy a larger multifamily. Thinking long term in real estate is very much needed, especially right now.  So here's a few longer range options to think about - which will then dictate a path forward.

If you want to acquire more properties in general (for whatever reason), could you buy/find additional properties that would cash flow what the other two properties were doing, and then some? If you can get that $500 per property plus some additional, then you end up ahead. If you take out that capital and it makes less than the $500 per property then you are net negative overall to your household budget (which is how I look at things).

Would selling the properties to unlock 100% of the equity make sense and then you could 1031 into something larger with more cash flow? Then you are building more equity (think of 5% appreciation on $750,000 versus 5% on $300,000), and with a larger multifamily the value is largely focused on the cashflow that can be generated and less on the market as a whole like single family properties do. This may be a great option if your goal is to break into the large multifamily or even some other asset type (industrial, office, retail etc).

Another option would be accessing the $140k, then doing private lending with it, so you get straight cash flow without the overhead of another property. You'd probably be able to get $1400 a month from lending that amount of capital, so that would cover the $500 per property loss, and then you would be up $400 a month total to your household budget.  And you don't have to worry about qualifying for a mortgage right now, the overhead of a PITI payment, tenant issues, or surprise costs for maintenance and repairs.

Brent Berg · Answer

Hello! Do you have time to chat for a few minutes today? I'm in the central time zone.