Using a Home Tap to access my Equity

[Kevin Wooleyhan]

I have a rental property that I fixed up in Norfolk, VA with 100k in equity. I have a heloc on that property for about 20k that I closed while living there. After I rented it out, that lender did not want to increase the line of credit since it was no longer a primary residence. And a cash out refinance wouldn't help because my current rate is 3% on my loan.

Therefore, when looking for ways to reinvest my equity for a new opportunity, I came across what is called a Home Tap where they will give you cash for a % of your home's equity. You would not have to make monthly payments and it does not impact your D/I. You can either sell the house in 10 years and pay them their portion of the equity, or you can buy them out of the deal. However, if they lend 10% of your home's value then they will require 20% to be bought out (and that 20% is based on when you sell or buy them out - so if you sell in 5 years then its 20% of your home's future value in 5 years). I think short term this area will be flat but long term it is growing so I would want to buy them out as soon as possible.

Ideally, I would like to retain ownership of all my properties, however, I find myself in a position where I need the money now and it ultimately would be reinvested into a business I want to purchase. I could also bite the bullet and just sell this property and pay the taxes and closing costs. I made a profit on the renovations and lived for free for a year and a half, so it still was a good investment... I just wanted to hold it for 20 years, not 2.  And this home is cash flowing about $1k a month but the business opportunity could potentially cash flow $20k a month. The business would be very active income, but I could still turn around and buy more property with that income. 

What is everyone's opinion on this situation? Should I consider the home tap or just sell the property? What metrics can I use to compare the opportunity cost with these two options? I would probably be looking to borrow 30-40k to then pay them back 60-80k. That is obviously more than closing costs if I were to sell it, but how does that compare to long term tax benefits, leveraged appreciation and cash flow I would give up if I sold?

Thanks so much!