Use all of HELOC or just enough for down payment?

Question

Edward B. · Answer

I agree that you should take out as much of a HELOC as you can. Even if the interest rate is higher. Case in point, I had a choice for an 80% LTV at 4.5% or 90% LTV at 5.75%. I opted for the 90% because it gave me access to another $30k of my equity. If used for quick turn projects like I prefer then the extra 1.25% does not make that much of a difference but the extra $30k is huge.

I also agree with the primary residence advice as well, or both if you can, but I always caution that you need to understand that you are putting your home on the chopping block. If worse comes to worse and you can't make the payment, they absolutely can foreclose on your home. So you need to be very smart about how you use that money and ensure that you can cover it no matter what.

One thing I learned here on BP is that just because the HELOC is against your primary does not mean that it is automatically deductible. I got called out on that mistake myself, I'm looking at you @Brandon Hall. The opposite is true too, you can deduct the HELOC interest on an investment property. The defining factor is what you used the money for, not what the underlying collateral is.

Finally, I would certainly take the tax savings into account for calculating my investment return but probably not cash flow. While you will technically realize that in cash, the government is going to hold onto that for you until you get your return. In other words, you cannot count on it in a pinch nor access it in a hurry. That is exactly what I was referring to above as one of the things that sinks investors.

Steven Eitreim · Answer

There's advantages and drawbacks to either option.  Getting yourself highly-leveraged (using all the HELOC) puts you in a risky position should you have unforeseen capital expenses, and no way to pay for them.  Worse yet, since most of the country has seen positive real-estate valuation gains since 2008/2009, should another "correction" occur, your equity withdrawl may leave you underwater on the property.  Couple that with a large capital expense, and your boat may sink.

On the other hand, another property is another property.  Sure, if your only driver right now is short-term cash flow, you just have to compare the cash-flow of one property with a smaller mortgage to two (or three) properties that are all much more leveraged.  (also take into consideration having to manage more tenants with the 2nd option).

But the beauty of the rental business is that, for the trade-off of managing tenants, you are essentially getting people to PAY YOU to buy YOU a new house.  At some point, if all goes according to plan, those mortgages will amortize into thin air, and you'll own rental properties free and clear.  And would you rather own one, or many?

I personally would take a middle-road.  Leave enough equity to maintain a solid standing on the current property financials (to weather a large expense or market correction), but utilize the rest for acquiring new solid properties.

Good luck!

Ronny Crawford · Answer

Dawn,

I believe it becomes a matter of preference for each individual.  My wife is more risk adverse and wanted to use the Cash Flow from our first property to pay off the existing mortgage faster.  However, I convinced her to leverage the debt from a refi to look for the next property. Our Net Profit was $19,000 after the refi, but our Cash Flow from property #1 went from $650/m down to $250/m because the mortgage increased from the refi.  I preferred to get our initial investment + $19,000 with less Cash Flow and continue to look for the next deal.

Consider what you would do with 80% Cashed out?  You could look for (2) properties with 20% down each, or possibly (3) depending on your price point.  I think it all comes down to your risk tolerance.

Ceril S. · Answer

@Dawn Curry We have used our heloc for both - a 20% down on buy and hold and to buy with "cash".  We pay down our HELOC aggressively, it is now also our savings account, emergency buffer, etc. But as far as "cheap money" at 3% - I don't know where else we could have the immediate availability and flexibility. And not having to jump through bank hoops for the purchase=priceless. Yes - having this at your fingertips could spell disaster - it's not for buying a luxury anything!

I wish I knew this before - it's about having your money work for you. Money tied up in equity is not working - it's stagnant. The goal is to have as little of your own money in the game. (But still have cash flow! Otherwise you're losing your money)  It's kind of crazy to think that I can "borrow" from the heloc for 100% of a cash deal and then pay 100% of that money back after a cash out refi and still have a rental property + equity to show for it. The bank's use other people's money all the time. Yes there is risk! Do your due diligence! It may seem like a magic trick and crazy that more people don't do it, but it is for real.

My wife was very against using the HELOC at first, I had to talk her through the numbers several times.

So, in answer to your original question - yes and yes or it depends ;)

Gloria Mirza · Answer

I haven't gotten to the point of needing a HELOC yet, but my advice would be to get a HELOC for as much as possible then only use what you need.  This way you save on closing costs since you only need one HELOC.  This only works if your DTI level can support a larger HELOC as most banks count the entire HELOC amount as debt, not just what you borrow.  Another piece of advice is to do the HELOC against your primary residence if you can since you will get better terms and in most cases you will be able to write off the interest this year even if your income from rentals is negative.  When calculating cash flow on a rental where the purchase was done using a HELOC against your primary, make sure to count the tax savings from interest in your cash flow analysis.

Edward B. · Answer

@Dawn Curry,

I agree with @Ronny Crawford. I like to pull as much money as possible out for the next deal but ensure that I am hitting my cash flow requirement. For example, I just refied 4 properties into one loan and could have taken more money out but opted against it in order to ensure they would still cash flow. I did pull out a bit more than I would have liked, however, because having your money locked up in a property is not ideal for an active investor. When that next deal comes along you will want to move. That is not when you start looking for ways to pull money out of your current investments.

Always be wary of the beast called over leverage, though. As Ronny pointed out you need to determine your level of risk tolerance and work within it, but leverage is one of the greatest benefits of investing in RE vice other assets so I believe it is wise to use it, intelligently and properly, if you are going to be in this space.

Dean Weltman · Answer

There are some very good posts in this thread. Personally, I would want to hold back some of that HELOC for emergencies. Assuming it's a LOC, you have the security of an emergency fund but you're not paying for it - although there is some opportunity lost... If it's a cash disbursement up front I'll be wanting to get a return on my money, ASAP.

And all that needs to be weighed against the cost of the money with the subsequent return, and then factor in the risk...

Neil Henderson · Answer

I was talking to one of my best friends last night, who is a banker with BofA, about getting a HELOC on my primary residence to possibly do some REI and he cautioned me against telling the bank that's what I would be using it for. He said, just tell them you want it for use in an emergency or for home improvement to your existing residence.

Is this true?

Daria B. · Answer

@Brandon Hall seems like @Edward B. tried to tag  you in the post.

@Dawn Curry you are doing what I did last year in getting the HELOC to use for investment purchases. It took me a while to figure out and learn just how to do this. I sit in-between risk-adverse and "roll the dice" so not sure what that's called. I do a lot of research and ask a lot of questions. Many that have helped me can attest to that. lol But I also see others going down the same path that I did or am doing so I can speak to the experience. Using the HELOC wisely is paramount, whether it's drawn on the primary or an investment property.

Use all of HELOC or just enough for down payment?

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