Should I use HELOC for repairs or pay cash?

[Phil T.]

Looking for some advice on how best to use my cash.  I'm a new investor, but I own two duplexes in Indianapolis (my first two properties).  When I purchased them, both sides were occupied.  At the turn, all of the units will need some rehab (mainly cosmetic, carpets, paint, etc).  Both sides in one of the duplexes are month to month and both of the units in the other are leased until next fall.  

My question is this: I have the cash to cover the rehab on all of the properties, but I also have a HELOC that I could use as well. What would be the best way to deploy my cash? Should I use the cash to purchase another property or hold it to use for rehab when I get vacancies (which I'm not sure when that will be).

Just wanted to see what some people with more experience at this than me think.  Thanks! 

[Thomas S.]

Assuming the cash you refer to is not your reserve funds you use it to purchase more properties. If it is your reserve funds you can use it for reno or use a HELOC and have the property then pay off the HELOC holding the reserves for emergencies. In that case I would choose the HELOC with the stipulation that the reno will increase rents high enough for the extra income to pay off the HELOC within 2 years time. If not then you are overspending on your upgrades/reno..

[Sam Shueh]

If you have a preapproved HELOC never use it leave it alone pay with your other funds(e.g. cash). The interest rate is variable and it will add up fast. It is 5.5% for <150K right now and can get up more soon.

[Phil T.]

@Sam Shueh I think part of your response got cut off. What would be the point of a heloc then?

[Account Closed]

Reserve funds (cash) or credit lines (HELOC)? Reserve funds are for emergencies. Most of the time, emergencies don't happen. But sometimes they do and having a way to handle them easily is critical.

When I started out, I didn't have much in the way of reserve funds (cash savings). Instead, I built up my credit lines (credit card limits). On those infrequent occasions when I had an unexpected expense, I put it on my credit card and paid it off as soon as I could. When I had enough equity in my home, I took out a HELOC and used that credit line to cover emergencies because the interest rate was lower. Today, I have the cash savings, but I still keep my credit lines active just in case something unexpected happens (my credit lines don't cost me anything to keep open and using them to pay for an emergency is more convenient than trying to transfer cash on the spot from savings to checking). Credit cards don't cost me anything to use if I pay the bill in full every month.

If you borrow money on a credit line while you have cash in the bank, the interest rate on the loan is usually higher than the interest rate you can get on the savings. In other words, the loan interest is costing you more money than if you withdrew the savings and lost the savings interest. While savings interest rates have been increasing lately (I'm getting 2% on my high-yield savings), HELOC loan rates are also going up (I don't own a home right now, so I don't have a specific number). A strategy to consider is pay renovation bills out of savings and depend on a HELOC for emergencies.

There is a "once in a lifetime" risk factor to consider. Other posts on BiggerPockets have pointed out that during The Great Recession, banks were cutting back or eliminating credit lines. In some cases, the borrowers were the problem because they were out of work. In other cases, the banks themselves were the problem because they had made risky loans and needed to stem their outflow of capital. If you want to hedge yourself against this extreme possibility, have both savings and a HELOC. Just realize if you leave the HELOC untouched (and depend on it only for emergencies) and stuff hits the fan, the bank may take away your HELOC.

[Nathan Gesner]

It depends on what you mean by "repairs". If you are talking about every-day maintenance equal to less than a month of rent, I would recommend using the cash. If you are talking about capex like a new roof, new flooring, or other major improvements then I would use the HELOC.

You want to use the cash for more investments that will bring a return. The HELOC can sit unused and you don't have to pay interest on it, so it's not costing you anything. One you use it, pay it off as quickly as possible.

[Phil T.]

@Nathan G. Not everyday maintenance. Things like painting/flooring/countertops, etc.

[Nathan Gesner]

@Phil T. As I said, it depends upon the price. I don't want to pay 5% interest or even 3% interest to paint a unit. I would rather save up the money and pay it with cash. If you had multiple renovations to make at once that would be a larger expense and difficult to save up for then a HELOC might make sense.

[Phil T.]

@Nathan G. That’s a good point in paying interest to paint/ put in flooring/ countertops, etc. I like that thinking.