Long term mortgage or keep it in the HELOC

[Stephen Lynch]

Hello,

I'm seeking advice regarding a new construction property I built in Columbus, Ohio. As a background, I have a well-paying job and am not in immediate need of cash. I'm not taking significant risks with new projects at the moment either so I'm not in a huge rush but also don't want to lose money as time goes on.

I decided to build this property in an up-and-coming area (B- grade) with an estimated rental value of $1800-$2000 per month. The total investment is $300,000, funded by cash and a HELOC (current balance $156,000, monthly payment $1200).

My initial plan was to sell the property for $350,000, making a $20,000 profit after closing costs. However, due to unexpected construction costs and delays, the project is now at break-even. It's been on the market for a while with no solid offers.

I'm facing the decision of selling the property at break-even or potentially a loss, or renting it and waiting for a better market. I believe the property could reach my original target price if interest rates come down.

My question is whether it's better to rent the property and use the 10% HELOC as my "mortgage" or do a 7.5% cash-out refinance.

The HELOC has the advantage of no closing costs and potential cash flow if I don't pay down the equity. I could also pay down the HELOC over time for lower monthly payments as time goes on (and subsequentially increasing the cash flow but also the equity I have stuck in the property).

The downside is uncertainty about how long I'll need to wait for a better market, and the HELOC being tied up until I can sell or refinance. I might have better cash flow just by paying off the HELOC and putting the $150,000 principal in a 5% high-yield savings account which has me considering selling (even for a loss) just to move on.

Any advice would be greatly appreciated.

[Caleb Mooney]

The HELOC doesn't make sense. The rate is too high and the leverage is too low to be useful. Unless you're investing the $156k in something that is making more than 10% you should pay the HELOC off. You can get a lower LTV DSCR loan and break even by renting it, but consider that interest rates probably won't drop considerably for a couple years, there are typically prepayment penalties associated with paying the loan off before 3 or 5 years, and there are costs associated with refinancing. You'll have similar issues with a conventional mortgage except for the prepayment penalty.

Do you want to have your money tied up in an investment that's breaking even and waiting for appreciation/interest rates dropping, or put that money into a new investment that could generate cash sooner? Nothing wrong with breaking even.