Cash Out or HELOC loan?

Question

Currently own a two family and a single family. I have enough saved to purchase another multifamily going the conventional loan route.

I have considered doing a cash out refinance on my two family to leverage the roughly $250k in equity. The property would still cash flow after refinance.

I spoke to a local investor with 40+ years of experience and he suggested not to buy now given the market prices and ongoing housing eviction limits. Suggested continue to save and wait a year or two when market comes back down to purchase another property.

Let’s say I continue to look but the market stays tough would I be better off just doing a HELOC or Cash out refinance?

I don’t love the idea of a cash out refinance and paying interest when I am not using the cash. The downside I see with the HELOC is the rates will likely go up - but I guess if I am not drawing on it the interest I am saving likely balances out somewhat.

I appreciate any suggestions.

Basit Siddiqi · Answer

I think it depends on how much you can pull out.If the amount is small, I think the HELOC is better because the total cost compared to a refinance will be less.If the amount is large, I think a refinance is better as the added costs is justified through a lower rate/fixed rate.

JM Payne · Answer

My experience was that I went with small, local banks.  As Jeffrey mentioned, terms will be less favorable starting out (65% ltv for the first one we did,) but with experience comes more rope.  Pick a bank you already work with and that knows you, and see what they can offer.  Best of luck!

Jeffrey St.Laurent · Answer

@Kerry Baird when I called around many banks will do a HELOC on an investment property just expect a higher rate than a primary and less max LTV 70-75%. Some banks won’t do a HELOC on an investment like you said many would.

My tax accountant told me the interest is deductible if used for repairs or another purchase but not if I took it out on my primary unless it’s used for repairs or building/renovations. I haven’t found anything that says primary HELOC and using for investment is deductible.

Consider the rates will be higher on the investment so may still make most sense take on your primary if you can.

I have heard the best deal on a HElOC you can get is prime minus 1. Does that sound right? And does that mean every bank that says they do prime minus one would have the same rate? Seemed like the rates differed to me but I wasn’t comparing them at the moment just researching options and how things work etc.

Kerry Baird · Answer

@JM Payne, do you have a suggestion for the right HELOC lender for this? I called and made a list of lenders that will do HELOCs on investment property, and also continue to see posts where people don't think it is possible.  (It is)

I wonder if you use a community bank? A credit union? A big bank?  What is your experience?  My experience is that TD Bank is really friendly for investment HELOCs, and so is PenFed (up to 4 properties) and US Bank.

JM Payne · Answer

This is literally my current business model, with rehab and renting out occurring between the two.  It's basically BRRRR and I'm using somebody else's money for the B part.  Works great.  BP has a whole book on it if you want to read up.  Have fun and good luck.

- jm

Jeffrey St.Laurent · Answer

Thanks @JM Payne and @Michael Ablan both of you share interesting points. My plan and strategy is buy and hold. Shopping around I am seeing HELOCs with longer term options, low current rate, but with a high max rate over the term if rates go up when the yearly review occurs.

It’s my understanding the cost to secure a HELOC is minimal and could give me the liquidity I need to make a deal. Is another strategy to use a HELOC to close on a deal and then refinance the property to secure the current low rate if you don’t plan to pay down the HELOC in a short term? I assume this would be better than worrying about an adjustable rate HELOC going up each year assuming there are no issues refinancing a property with a HELOC?

It was so much easier buying properties without trying to leverage equity. This is a new world for me and everything you share is appreciated.

Michael Ablan · Answer

@Jeffrey St.Laurent  -  Pros and cons

Cash out refinances put the $ in your account today and at a lower interest rate.   However, now you're locked into a closed ended loan where your paying nearly all interest for the first 10 years (unless you go for a shorter Amortization).  That means, if you decide to sell in year 3 then you've paid 95%~ interest on your loan, rather than the marketed 2.3% that's only realized if you hold the loan for the full duration.

HELOC's are nice because you only pay interest on money spent.  The interest is higher, but if you're a high earner, you can rapidly pay it down while you wait for your next deal. You're overall interest paid will be significantly lower.

Good luck!

JM Payne · Answer

Something to consider;  Cash out will lock you in at a low rate and give you flexibility over 30 years while your tenant pays the money back.  Helocs traditionally are short term lending solutions with adjustable rates that often can get  called as soon as a year out.  While it's likely that it could be auto renewed, there is less stress knowing that you are set for 20 to 30 years than wondering if you will have everything wrapped up and paid back when your heloc comes due.  Just be clear on the terms of your heloc if you decide to go that route, and I'll give an example of the first one we ever did;

One year heloc with a 5.5% adjustable rate not to exceed 6.5 (this was 2018)  So off we go shopping, and because it takes time to find a deal, we didn't end up closing until 8 months later.  No interest or money paid during that time, obviously, as no draw occurred.  But at month 11, I get a notice for renewal, because the bank counts the year from the initial origination, NOT the draw.  Luckily getting a month extension was a very simple email away, and we sold the flip and paid it off a month later, but things could have gone very differently had, say, covid or a recession hit as I was trying to unload the flip.  With a cash out, we would have had a much longer sunset and a better rate.  My new heloc, by comparison, is 7 years with an annual review, but obviously rate is higher.  Best of luck with whatever you choose!

- jm

Jeffrey St.Laurent · Answer

@Tracy Streich thank you the more I think about it HELOC seems to make the most sense especially if I am going to be patient (which I should be) for the right property.

Tracy Streich · Answer

@Jeffrey St.Laurent I am a fan of the HELOC.   You only pay for the money when you use it and when you pay it back the loan payment stops.  Still have access to the money for multiple deals and not paying each time you do a deal.   Good Luck