Investor · Austin, TX · Member since 2015 · 42 posts · 21 votes
#askBP
I have $30k saved and ready to use. Is there an advantage to using this to pay down my current (primary) mortgage and then getting an equity line of credit, or should I use this strictly as investment capital?
The reason I ask is because... well I'm ignorant. But also because I see the advantage of having an equity line of credit to pull funds as needed without having to go through an approval process each time. So, I thought if I paid down my mortgage I would have more available to me through the line of credit.
I struggle with this as well. I have two investment properties where I have between 30 and 50% equity today. Fundamentally I hate debt so I have an internal struggle with not accelerating debt payments even though I know it may be smarter or more efficient to keep the cash ready for future investments.
There are two more properties that I have my eye on and I want to be ready to buy them when they become available. So, for now, I keep the cash...
Honestly everyone has their own opinion. That being said personally I would just use your saving to reinvest. While some people have been very lucky at using home equity loans etc, I am having a lot of trouble tapping my equity! I have 130k in two houses and having over 4 houses I am struggling to find anyone/any way that will allow me to tap this equity easily without being supper expensive and defeating the purpose. Therefore I personally would recommend sticking to the easier side and just using that money to buy an investment. that's just me!
Ps home equity lines are expensive based on what I have seen :( so they don't make sense and cash out refinance is where I am struggling.
I guess it all depends on your longer term goals. I wonder if you could qualify to get a home equity line even if you didn't pay down your loan with your own cash? That would be the best of both worlds, since you may have twice as much capital to use to invest in other real estate.
If you were to use your cash directly for the new investment, you wouldn't have to rely on a lender at all. Plus, if you pay down $30,000 you may only qualify for a $30,000 or even less depending on your equity position.
I'd suggest approaching a lender to see if you can get a HELOC now. Some lenders will give you up to 90% combined loan to value. Meaning if your property is worth $100,000 and you currently owe $60,000, they may be willing to give you a $30,000 credit line for a total loan to value of 90% between both of your mortgages.
It's always better to have the money available before you find the right property. We've used HELOCS and cash out refinances to fund the purchase of new deals. It's a great way to leverage your assets. For alternative ideas to get cash, you could borrow against your retirement or take out a cash out car loan, if you have equity in a vehicle.
I hope this helps! Let me know if you have any more questions. : )
If you know you will use it for investing either way, then I would just keep it in cash. If you use it to pay down your mortgage, and then turn around and pull it out for investing, you will likely be borrowing at a higher rate of interest than what you have for your primary mortgage. Unless your HELOC rate is substantially lower than your primary mortgage rate (possible, but very unlikely), you would be better off not paying down your mortgage. Also, there is no "approval process" to spend cash, so you don't have to bother with the bank at all if you keep it in cash. Finally, most HELOCs don't allow you to borrow 100% of your equity in a property (usually around 75-90%), so if you put that money towards your mortgage, you might only have access to a portion of it when you take it back out via a line of credit.
Just to clarify, this is only if you know you will use it for investing either way - there are other personal considerations to take into account if you wanted to pay off your mortgage for other reasons (lower debt, refinancing, lower monthly bills, etc.).
I struggle with this as well. I have two investment properties where I have between 30 and 50% equity today. Fundamentally I hate debt so I have an internal struggle with not accelerating debt payments even though I know it may be smarter or more efficient to keep the cash ready for future investments.
There are two more properties that I have my eye on and I want to be ready to buy them when they become available. So, for now, I keep the cash...
Why would you take a loan on cash you just had in hand? I mean you'd literally be taking the cash you have in your hand, giving it to a bank, then asking for it back a few days later....but be paying interest??? I don't get it. I don't mean to come off as rude...I just may be missing something.
It's not like if you paid down your note by $30,000 your mortgage payment would go down...you would just be taking a couple years of the procurement of the loan.
Maybe paying it down then doing a cash-out refinance would make sense if you had a bad interest rate?
Hi @Cory Damon. Congrats on having $30k in cash! What are your goals, then? Do you have other debt (car loans, student loans, credit cards) you would rather satisfy with this? That's a risk-free, tax-free return in essence.
Is your goal to have a paid-for house? What kind of loan is on your home? Low rate, fixed term? An ARM with a balloon? Will this pay a large chunk of your mortgage, or just a drop in the bucket? Do tell!
Why would you take a loan on cash you just had in hand? I mean you'd literally be taking the cash you have in your hand, giving it to a bank, then asking for it back a few days later....but be paying interest??? I don't get it. I don't mean to come off as rude...I just may be missing something.
It's not like if you paid down your note by $30,000 your mortgage payment would go down...you would just be taking a couple years of the procurement of the loan.
Maybe paying it down then doing a cash-out refinance would make sense if you had a bad interest rate?
The answer is in your question. Follow the money. If you put cash in, get it back out, and put it back into the next deal, and get it back out, etc...you are using the same cash over and over again.
Now, before you can say you are getting charged interest on it, look again. You may be getting the bill...but your tenant is making your payments.
Not rude at all, I appreciate your insight and that you took time to respond. I was thinking that by paying down the principal I'd have more access to cash if/when needed it through the HELOC (over and above the $30k). But as I read the responses I see the downside to this approach. Thanks again for your comment.
I have $215k remaining on a 30yr fix. I don't have any other debt besides this. And perhaps this is why I ask the question. Like @Allen Clark I have an urge to get rid of debt but this may not be the most effective use of my cash at this point.
No problem. I think you just needed to provide a little more information that is all. You'll find that the more specific you get on questions, the better answers you will receive, and people on BP LOVEE getting into the minutia of deals! So, you'll find it very helpful.
I was also thinking you were looking to immediately use the money to buy another property so it didn't make sense to me to put it into the house.
Could you not get a HELOC without putting the $30k into the house?
Ok great. Thanks for the new info @Cory Damon. We still don't know your rate and terms on the $215k, but my vote is to hold onto the cash assuming it's a conventional loan. $30k (provided you don't have an ARM with a balloon or something) doesn't move the needle enough. Nothing wrong with a cushion of cash. That gives us options! Well done!
Analyze your net worth and do what increases your net worth. The bottom line is doing what will give you more wealth. With that being said I would definitely use the money to add to your asset column using good debt.
I would say it depends on your investing strategy. If you plan on using it as a down payment on one property and hold it, waiting for income to give you another down payment then I would use it on the down payment instead of a heloc. If you plan on incorporating a BRRRR strategy to recycle your money and accelerate your acquisitions then I would argue towards paying down your mortgage and getting that heloc. @Joe Villeneuve Can speak to this better then I can. Will probably need more then 30k to use the BRRRR strategy properly though.
One thing that hasn't been mentioned is that paying down the mortgage will accelerate your amortization schedule so every payment after that large pay down will result in more principle pay down instead of throwing away at interest.
@Cory Damon I would say it depends on the goals you set out for. The more you can grow you net worth, the better you are. If I were you I would think about investing it.
@Cory Damon, welcome to BP. You are taking a great initial step to educating yourself about real estate and working toward implementing what could be a life-long income strategy. It almost never makes since to buy your personal residence.
Take a look at this BP post: http://www.biggerpockets.com/forums/311/topics/166268-rent-or-buy-ratios
Invest your money (but keep a healthy amount of cash on hand always).
You can buy your dream house a few years from now with the proceeds you made from that $30K. It will be a much easier decision.
Cash is King but money is still very cheap! Having the HELOC is a great tool and shouldn't be that hard to get on your primary residence but keep in mind that getting over 80% LTV is rare so you wont get dollar for dollar out and you may not get the appraised value you desire. The interest on up to $100k of HELOC debt is tax deductible which helps. A HELOC will have a variable rate which is fine now but may begin to creep up over the next few months and years, so its probably not a good idea to plan to use it for a long term buy and hold that you might have trouble refinancing or paying off when rates rise....and they should at some point but who knows when.
Good job saving up the 30K. I know its not easy. I would personally recommend holding on to the money in liquid form (cash) if you plan on doing any sort of real estate investing. It just makes everything easier when you have some cash to throw into a deal without the bank hassle.
30k is a good downpayment for a decent flip deal with hard money or a cheap rental.
Cory, wow, welcome toBP! Fantastic feedback, our 2 cents would be, no lazy assets. If you have a $1,000 emergency fund liquid and 3-6 months of your BAM, bear --- minimum to live, consider a sep-Ira with a check book LLC to create your Strategies from and take advantage of the benefits allowed under current law.
Not knowing your current rate, at 3- 4% it is very cheap money, almost Free! We Are COMMITEd To Locking Up ALL The 3-4% Property Loans We can. Great question and responses!
The typical consumer looks at a windfall and thinks, "how can I spend this?", or looks at "a lot" of money they've saved up and thinks, "I can reduce my interest expense by paying down (some loan: their home loan/mortgage, credit line, etc.)."
Now, there's nothing wrong that, of course.
However, let's look at it from an entrepreneur's perspective:
The entrepreneur looks at that sum and says, "where can I invest this to produce income?"
In the end, you'll need to choose which is right for you.
I see a number of people want to give you advise based on their perspective.
The correct answers is: It depends!
You would first look at your current role as either investor who is 1) A starter, 2) An estate builder, or 3) An ender.
The great majority of posters on BP are really pre-starters, meaning they have yet to take any substantive action or seen measurable results. This sets you in a class above as you actually have some dough and presumably, some experience.
This means you are probably somewhere between a starter and estate builder phase. If this is accurate, you'll probably want to put much of the money into working capital.
The next matter has to do with your age, projected remaining investing years and your tolerance for risk. I've bifurcated my portfolios into risk and appreciation and cash flow aspects.
With $30,000, you probably don't want to make things too complicated. Debt or no debt, I've learned that you ought never run out of cash or things get really tricky.
Btw, my best ROI has been in my real estate education outside of online discussion forums.