Advice on Refi-Cash Out or HELOC to fund investment property.

[Lori Greene]

I want to hear from anyone who has bought an investment property using a Cash-Out Refi or a HELOC.

1. How restrictive do you feel each of these options are?

2. What are the benefits?

Looking for mortgage experts in refinance cash-outs or HELOCS or for homeowners who have done this and what your experience was with it, advice, pro's, con's, etc.

[Greg Scott]

Lori:

Yes, I've done that a few times.   It can be a great way to go.  Why?:

• A cash-out refi or drawing funds against a HELOC is not a taxable event. Thus, you do not pay any taxes to increase cash for the purchase.
• It is a great way to tap equity in a an appreciated property.   When a property appreciates, your return on equity drops.  in other words, you aren't making the most money you could.   
• If you are borrowing at 4,5, or 6% but you can invest and make 10, 15, 20% you make a lot more money off the same amount of resources
• Having more cash flowing properties actually reduces risks.  If you only have one property and a tenant moves out, you now have zero revenue.  If you have 10 properties and a tenant moves out, you have 90% of your normal revenue.

So, what are the downsides?

• The increased debt on your original asset will decrease cash flow from that asset.  (However, if you buy another property right your total cash flow will increase)
• A HELOC really is a short term instrument. Many have 5 or 10 year balloons. Some can be called by the bank at any time. So, while a great way to get equity out at the right time, you should develop a plan for replacing it with long-term debt.