$250K - Invest as Cash or Pay Down Mortgage and Take Out HELOC?

[Nicholas Q.]

We recently sold a rental property in Seattle and have netted about $250K that we plan to reinvest in a market with better returns. However, we are struggling with whether to reinvest this money as cash or to pay down some principal on our primary mortgage and take out a HELOC to reinvest. For our primary mortgage, we are 2 years into a $600K 30 year 3.75% fixed conventional loan.

Here are some pros and cons I can think of for each option:

Invest as Cash

Pros:

• Very liquid
• Less risky
• No interest on cash amount for next investment
• Keep higher primary home interest expenses for tax write off

Cons:

• Sits in savings account earning 1% until reinvested

Pay Down Primary Mortgage and Take Out HELOC

Pros:

• Saves $275,000 interest and reduces payoff during to 15 year on primary mortgage

Cons:

• Puts primary home at risk if future rental property investment goes bad
• Higher and variable interest rate on HELOC
• Banks could close HELOC at any time removing my access to the funds for investment
• Miss out on tax benefits of higher primary home interest

Ultimately, our goal is to have no personal debt including primary mortgage, while building a steady stream of cash flow through rental properties over time. Based on these objectives, the idea of paying down the mortgage while also having a HELOC available to invest is enticing. I also know that the interest costs on a HELOC might negate any of the primary mortgage interest savings listed above, but what if we are using the HELOC for the BRRR strategy and paying it off each time we roll those properties into a conventional loan?

Anyways, I'm curious if anybody has other pros and cons that I am missing.  What would you do?

[Matt J.]

@Nicholas Q. Random question - you said you sold a rental property and took/are taking the cash. If you depreciated the rental you’ll have to pay back that depreciation come tax time. I’m speaking from experience that this can be a substantial amount. You’ve probably already considered this though. In your response to your original question I have HELOC’s on both my primary and one of my rentals so my vote is to pay down the primary. I like this strategy so that when my money isn’t being used I have a lower payment. I’m fairly conservative though.