Paying down HELOC or principal on properties

[Kim Stofan]

I was hoping some experienced investors could weigh in on something my husband and I have been discussing. We took out a HELOC on our primary residence to pay for some home improvement projects and to use as down payments for rental properties. The line is 100K and we have it pretty much maxed out. The interest rate is around 6% but is variable. We have purchased three out of state buy and hold properties that cash flow about $200 per month. Our real estate goal (for now) is to have a portfolio of 10 properties. We are hoping to have these properties free and clear as soon as possible.

I would like to use the cash flow to pay down the principal of the properties and snowball it. My husband feels like we should use the cash flow to pay down the HELOC. He believes it will allow us to buy more properties sooner. I would prefer to keep the business money and our household money separate. Does anyone have soon input/ advise on this matter? Thanks!

[Thomas S.]

You take risks holding equity in a property. Lawyers love to go after money. Left sitting dead in a property makes you a target.

Additionally equity in a rental kills cash flow.

With a opportunity value of 10% for every 100K sitting dead and buried in a property you are reducing the cash flow by $833/month from the property. The property is not generating the income it is the dead equity that generates income. It does not take much equity to reach a point where actually owning the property becomes a liability rather than a asset. You would make a greater return on the cash parking it in a mutual fund.

Cash must be forced to earn it's keep. It can not do that lying dead and buried in a single property. Make it work by spreading it around several properties and keep the equity at a minimum in a rental.

Pay off the HELOC and reuse it to buy more properties. Pull out the equity in your rental properties as it grows and reinvest.

Wash, rinse, repeat.