HELOC vs Home Equity Loan vs Cash Out Refi to Start BRRRR

[Ryan Graham]

Hello everyone. I'm new to BiggerPockets and this is my first post! I've recently finished reading Brandon Turner's "The Book on Rental Property Investing" and am about 50% through David Greene's "BRRRR." I have decided that I'd like to pursue the BRRRR strategy. Although I have some cash saved up, I don't have enough for my first deal so am considering some options with my primary residence in order to have access to additional capital. However, I'm struggling to decide the best method to pull equity out of my home, specifically for the purposes of starting out with the BRRRR strategy. It seems there are essentially three options for me to choose from. Here is my take on each of them:

1) HELOC: a reusable amount of credit with a variable rate.

2) Home Equity Loan: a 2nd mortgage on my home, only for the equity, with a fixed interest rate

3) Cash out Refinance: replacing the current mortgage on my home with a new mortgage for 75% - 80% of the current value, and receiving the extra equity in cash.

My specific question is, which is these is the preferred method when using the capital gained to begin investing with the BRRRR strategy?

Some additional info about me that may be helpful:

1) I have significant self control and am not concerned about spending the money away that I would get from any of these options. I would set it aside just for the purpose of BRRRR and nothing else.

2) Between the equity in my house, and the cash I already have saved, I will have enough to begin my real-estate investing BRRRR journey if I can find the right deal.

3) The interest rate on my existing mortgage is 4.5%

I'm very anxious to hear your thoughts and sincerely appreciate any help or advice you could give.  Thanks!

[Tim Delaney]

Depending on how much equity you have in your home you will probably get the best terms on refinancing and pulling out what you can. If you plan to do one BRRRR after the next then you will still be utilizing the money so it won't matter that it is not a revolving line.

A couple things to consider though - if you refinance and your payment goes up will you still have a good enough Debt to Income ratio to refinance your rental property? The lender will consider the rental income, but they may not consider all of it. If you do end up going the HELOC route and you max out the amount available to you it can negatively impact your credit score because of your debt utilization rate. It won't make a major difference, but if you have any other blips on your credit report it could cause a big enough drop to jeopardize your refinance on the BRRRR.