Refinance options Cash out or HELOC?

Question

Good afternoon everyone,

I purchased a rental last year for 55k, put about 3.5k into it and brought the rent up from $750 to $800. We are currently cash flowing $425/month off of the property and the tenant is a good tenant so far. The original appraisal said that the house could be worth 75k if we were to update some things, which we did. So, the house directly across the street (which is smaller but nicer) just sold for 98k. We are weary of a potential spike in housing inventory next year and want to have cash to be ready to strike. My partner and I are both in our mid 20s so we don't have a whole lot of capital at the moment. What do you think our options are? I would like to keep the tenant and the house, it's a solid house in a good location. I am planning to read the BRRRR book, but I have to finish two other books before I can get to it.

Sorry if I rambled a bit, would looking into a cash out refinance or a HELOC be a better choice for us?

Thank you for reading and have a good day,

Dan Milinazzo · Answer

@Phillip Austin Both options have their value.  You dont have a huge spread there if you think you are at $75K now because a cashout refi is typically 70-75% LTV in my experience and a bit hefty in the closing costs.  If you think you are closer to $98K you have a little play there.  I dont have all the facts, but I would lean towards a HELOC because there may still be some 75-80% LTV options out there and the closing costs are minimal.  There are some other things to consider though.  I actually did both on the same property for different reasons.  The equity spread was pretty good for me due to recent market appreciation, but if I cashed everything out that I could I would be in the negative cashflow territory.  So I cashed out what I could to ensure the new mortgage payment would leave me with no less than the cashflow target I had settled on.  Now that I did that I still had some equity left so I pulled a HELOC out for the balance that I was able to.  The HELOC is good because its available funds that you pay nothing to hold on to typically, but once you use it you need to make sure whatever it is being used on generates enough return to cover the HELOC Payment and still churn out a little cashflow.  The cash on the other hand, well "cash is king", I can deploy it as necessary or hold it for cash reserves to pay against the HELOC.  I could get way deeper into the weeds here, but I will save you the pain of that.  If you want to know more message me and I will detail everything out for you.  If you only have one choice and will commit to deploying the funds in a cashflow positive manner you can target a lower ROI using cash but if you use HELOC funds you need to generate a minimum ROI just to cover the HELOC payment before you start seeing any real ROI.  Hope that makes sense.