Personal Funds vs. HELOC to Fund a Property

Member since 2023 · 74 posts · 18 votes

Hello,

My question is how to decide which source of funds to use for which part of the investing process. If I have saved roughly $15-20K of my own money and have about $60K in a HELOC, which should I use first? Should I use one versus the other for a down payment? What about for rehab costs? Does it matter? I have also read that having a sizable emergency fund is vital, as well. Should I have this established before purchasing a property, or accumulate it over time after making a purchase?

I know there are a lot of questions here, so I appreciate any advice/thoughts anyone is willing to share!

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Andrew FreedBusiness Member

Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes

@Kyle Kline - I agree with the previous feedback. It is important to be cash heavy in real estate hence I would grab from the line and have a strong cash position if I were you. The main reason businesses fail is because they run out of cash hence having a strong cash position as a business owner is vital. Good luck with your investing!

[email protected]781-964-3200 Podcast Guest on Show 69 Doors from ONE Real Estate Deal Using Other People’s Money

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Gregory SchwartzBusiness Member
Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
2y
Hey @Kyle Kline, these are all great questions to ask and ultimately it will be personal preference.
My preference was to have a large emergency account. I have had unexpected issues pop up way too many times in the last few years, and each time I was very grateful for the extra capital I had stashed away. We've replaced 5 water heaters in a single year, had plumbing stoppages that resulted in 3-5k worth of work, and even had to replace 1/3 of the pier and beam foundation in the house we're currently living in. NOT FUN, but we had the money to weather the storms.
Today my wife and I shoot for 6 months' worth of spending in our personal emergency account and about the same in our rental property emergency account.
Hope this helps
[email protected]443-812-0357
Schwartz Realty Group5118 Reviews
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Andrew FreedBusiness Member
Investor · Worcester, MA · Member since 2020 · 1k+ posts · 1k+ votes
2y
@Kyle Kline - I agree with the previous feedback. It is important to be cash heavy in real estate hence I would grab from the line and have a strong cash position if I were you. The main reason businesses fail is because they run out of cash hence having a strong cash position as a business owner is vital. Good luck with your investing!
[email protected]781-964-3200 Podcast Guest on Show 69 Doors from ONE Real Estate Deal Using Other People’s Money
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Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Gregory Schwartz:

Hey @Kyle Kline, these are all great questions to ask and ultimately it will be personal preference.
My preference was to have a large emergency account. I have had unexpected issues pop up way too many times in the last few years, and each time I was very grateful for the extra capital I had stashed away. We've replaced 5 water heaters in a single year, had plumbing stoppages that resulted in 3-5k worth of work, and even had to replace 1/3 of the pier and beam foundation in the house we're currently living in. NOT FUN, but we had the money to weather the storms.
Today my wife and I shoot for 6 months' worth of spending in our personal emergency account and about the same in our rental property emergency account.
Hope this helps
Thanks for your feedback! If you don’t mind me asking, do you have a separate emergency account for each rental property? Or do you keep it all in one? Thanks!
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Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Andrew Freed:

@Kyle Kline - I agree with the previous feedback. It is important to be cash heavy in real estate hence I would grab from the line and have a strong cash position if I were you. The main reason businesses fail is because they run out of cash hence having a strong cash position as a business owner is vital. Good luck with your investing!
Thank you for your feedback!
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Gregory SchwartzBusiness Member
Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
2y

Thanks for your feedback! If you don’t mind me asking, do you have a separate emergency account for each rental property? Or do you keep it all in one? Thanks!
We have one business account per ownership entity. We didn't set up a specific "emergency" account however we have a minimum that we keep in the operating account. For example, we want a minimum of $10,000 in the account associated with our fourplex an 2x single-family rentals.
[email protected]443-812-0357
Schwartz Realty Group5118 Reviews
Website View Page
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Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
2y
I think a key part of building wealth is being paranoid and optimistic at the same time. Using my own cash makes me paranoid and a much better investor. I'm a cautious spender vs. borrowed funds that I throw around like free money.
Figure out what your reserves need to be and keep it there, but don't hoard cash. You'll get scrappy, learn how to do things on your own, and figure out ways to earn extra money if/when you need it. I'd rather you do that than go borrow $40k. If you do pull out money from the HELOC, have a plan to pay it back within 18 months. It's a short term debt instrument and needs to be treated that way.
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Zach BossonBusiness Member
Lender · Member since 2023 · 42 posts · 15 votes
2y
@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.
[email protected]888-885-7789
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Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Gregory Schwartz:

Thanks for your feedback! If you don’t mind me asking, do you have a separate emergency account for each rental property? Or do you keep it all in one? Thanks!
We have one business account per ownership entity. We didn't set up a specific "emergency" account however we have a minimum that we keep in the operating account. For example, we want a minimum of $10,000 in the account associated with our fourplex an 2x single-family rentals.
Awesome, thanks!
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Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Travis Timmons:

I think a key part of building wealth is being paranoid and optimistic at the same time. Using my own cash makes me paranoid and a much better investor. I'm a cautious spender vs. borrowed funds that I throw around like free money.
Figure out what your reserves need to be and keep it there, but don't hoard cash. You'll get scrappy, learn how to do things on your own, and figure out ways to earn extra money if/when you need it. I'd rather you do that than go borrow $40k. If you do pull out money from the HELOC, have a plan to pay it back within 18 months. It's a short term debt instrument and needs to be treated that way.
Thanks for the advice!
0 Reply
Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Zach Bosson:

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.
Great, thank you!
0 Reply
Denis PonderPro Member
New to Real Estate · Yuma, AZ · Member since 2023 · 280 posts · 246 votes
2y
Quote from @Zach Bosson:

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.

Agree here. Use the cash first so you aren't paying interest. Use the HELOC as the emergency fund. However, make sure you are building the cash reserve part back up as well.
0 Reply
Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Denis Ponder:

Quote from @Zach Bosson:

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.

Agree here. Use the cash first so you aren't paying interest. Use the HELOC as the emergency fund. However, make sure you are building the cash reserve part back up as well.
I appreciate the input! I suppose the idea of using the HELOC is that it allows me access to greater funds more quickly than waiting around to save up the same amount in cash.
0 Reply
Denis PonderPro Member
New to Real Estate · Yuma, AZ · Member since 2023 · 280 posts · 246 votes
2y
Quote from @Kyle Kline:

Quote from @Denis Ponder:

Quote from @Zach Bosson:

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.

Agree here. Use the cash first so you aren't paying interest. Use the HELOC as the emergency fund. However, make sure you are building the cash reserve part back up as well.
I appreciate the input! I suppose the idea of using the HELOC is that it allows me access to greater funds more quickly than waiting around to save up the same amount in cash.
If that's the case, it makes sense. Just be certain you have the cash flow to cover the HELOC payment as well.
0 Reply
Kyle Kline
OP
Member since 2023 · 74 posts · 18 votes
2y
Quote from @Denis Ponder:

Quote from @Kyle Kline:

Quote from @Denis Ponder:

Quote from @Zach Bosson:

@Kyle Kline
Why not use the 15-20k in savings and lose out on the 5% interest instead of incurring 8%-13% on the HELOC?

In an emergency situation you could always access the HELOC at 8%-13%.

This emergency situation should be considered before the funds are accessed with either method, can you afford to have no savings AND be paying 8%-13%. Is the return on the use of the funds worth that risk?
Questions to consider. But my rule of thumb is always use my cash before I pay interest knowing I can always draw later if I need to.

Agree here. Use the cash first so you aren't paying interest. Use the HELOC as the emergency fund. However, make sure you are building the cash reserve part back up as well.
I appreciate the input! I suppose the idea of using the HELOC is that it allows me access to greater funds more quickly than waiting around to save up the same amount in cash.
If that's the case, it makes sense. Just be certain you have the cash flow to cover the HELOC payment as well.
Got it, thank you!
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