House Hack Help Finance Questions

[Shayne Garcia]

Hey BP family! Question from a newbie here. Recently I purchased my first investment property by way of using a HELOC on my existing home to finance the cost to purchase a second home that I am now living in. I have successfully secured a tenant for my rental and we are off to the races. To set the scene further, I didn't have much working capital to do this so this move was to hopefully break me into real estate. This brings me to my question.

My initial strategy was to use the HELOC to cover the capital I didn't have up front to buy the 2nd house, and somewhat aggressively pay it back (4-5 years max). I can by my math do this with no additional funds out of my pocket, just by applying my positive cash flow from the rental to the HELOC each month in payment.

However, this purchase happened a couple months ago and the current state of interest rates have me wondering if it would be wise to see if I could pay off the HELOC debt now vs over time by refinancing the mortgage on my rental (1st house) as a cash out refi and using those funds to clear the HELOC. Or if it makes more sense to just continue to pay down the HELOC asap knowing it may take up to 5 years for me to do it.

Thanks for any advice you can provide!

[Axel Meierhoefer]

@Shayne Garcia It's an interesting question and my answer would be - consider doing both. I assume that you have a mortgage on the property as well as the HELOC. If the interest rate of the mortgage is not already below 4%, I would keep monitoring developments in the market. But be aware that you will not get the same rates as you did when you were living there because there is a difference between investment properties and owner-occupied properties. Lenders and banks want you to believe that it is more risk for them to give you money for rented properties. I totally disagree. If they qualify you properly they actually have less risk because there is a tenant and then there is you to pay them. In owner-occupied its only you. Still, the rules are made for banks - go figure.

The point is that there is a chance that interest rates for mortgages are getting so low that refi might be an option. If you compare to Europe rates are between 1% and 2% right now.

I always say: regular mortgages are like long term commitments. They give you the money at the start and you pay back over time.

HELOCs are much more like credit cards. You have a certain amount you could spend but on a month to month basis, you can decide if you max out the card or if you only use part of your credit line.

That also means if you were to convert the HELOC you have into a mortgage for the whole amount (old loan + HELOC) you will lose that flexibility. If you are in a position to have the tenant pay back your HELOC I owudl keep it. you might also consider that this HELOC can then help you a second time to pay another property and you would then have two tenants (or the positive cash flow from both properties) to pay back the HELOC. It's basically "other people paying your credit card off"

If you pay off right now or convert into a mortgage you would not have that option.

It's not ideal to describe this in writing. If you like to talk about it, send me a PM and we set up a call.