# How to Calculate Cash on Cash for HELOC?

21 Replies

Hello,

There's a duplex that's going for \$250k, with gross cash flow at \$1900. Vacancy at 7% (\$133), Insurance \$70, Maintenance / CapX at 7% (\$133), Taxes \$75.

I've got a HELOC that lets me borrow up to \$63,000 at a Variable interest rate of Prime - 0.25%. Today that means it's 4.75%.

If I use the full HELOC for the down payment, that's \$250 / month in payments, and that'll give me \$188 in net cash flow after all expenses.

I've also got maybe \$30k I can put down, which will increase my cash flow by about \$125/ month.

So, my question is- would yall make the down payment pure HELOC? Or put down more of my own money for more cash flow?

How do you calculate cash on cash when you're using a HELOC for a down payment?

Make the 25% down payment requirement wit the 62k from the HLOC. Keep your cash hand on for emergencies and opportunities.  Keep in mind your hloc payment will go up if rates rise since it's variable.  Jim

@Brian Kwan Wouldn’t you be required to put down almost the entire amount anyway? I.e. 20% Down plus closing costs = 60k+, I presume.
@Jim Blackburn Would you need 25% instead of 20%, assuming it’s one of the first 4 conventional mortgages?

25% down for investment multi family.  There are some programs with just 15% down for investment if single family or condo.  Also there are some programs with just 3.5% down for 4 unit but only if primary residence.

so for this you are looking at 25% down plus closing costs 6-7k.

Never been a fan of COC. It is easily manipulated. In your case, if you use borrowed money for the down payment and technically have no money in deal the COC is infinite. The opposite would be, if you paid cash the COC would be pretty sad.

I would use the HELOC and hold onto your cash. There is some interest rate risk, I would expect the rates to continue to rise in the near term. Long term is anyones guess.

Thanks @Jim Blackburn@Lesley Resnick ! So you two would use HELOC- and that's what I've heard.. I think what I don't understand is why not use the HELOC for emergencies instead of cash? As in, why should I pay a variable HELOC interest to use for a down payment when the cost to use my cash is free and it's sitting around not doing anything anyway? I appreciate your thoughts!

@Jibu V. yup, I just have some cash to use. So I'm trying to figure out whether I should use a HELOC/ cash hybrid for the down payment or just a HELOC. Thoughts?

It is a matter of personal choice to use the HELOC.  The interest charge is negligible 4.75 and it is tax deductible, for a net effect of 3.5% (assuming 33% tax).

Originally posted by @Brian Kwan :

Thanks @Jim Blackburn , @Lesley Resnick! So you two would use HELOC- and that's what I've heard.. I think what I don't understand is why not use the HELOC for emergencies instead of cash? As in, why should I pay a variable HELOC interest to use for a down payment when the cost to use my cash is free and it's sitting around not doing anything anyway? I appreciate your thoughts!

@Lesley Resnick Ah gotcha. So.. I heard that the tax law no longer allows us to write off the HELOC interest rate.

IRS Example 2: In January 2018, a taxpayer takes out a \$500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a \$250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed \$750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a \$250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Am I interpreting this correctly? I believe we can write it off if we make improvements to our house, but not to acquire another.

WOW, my day is RUINED!  That is my read as well.  :-)

I knew there was talk of it changing and subject to interpretation.  I incorrectly thought the IRS had not put out a statement clarifying it.  Seems clear to me now.

Keep the HELOC as an emergency fund!

Originally posted by @Brian Kwan :

@Lesley ResnickAh gotcha. So.. I heard that the tax law no longer allows us to write off the HELOC interest rate.

IRS Example 2: In January 2018, a taxpayer takes out a \$500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, the taxpayer takes out a \$250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages does not exceed \$750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a \$250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Am I interpreting this correctly? I believe we can write it off if we make improvements to our house, but not to acquire another.

@Lesley Resnick Thanks for helping to process this with me! You were truly helpful.

Good luck.  Let me know how it turns out.

Best option would be to put minimum down on property. Use your 30K cash and the remainder from your HELOC. You then use the remainder of your HELOC as your reserve fund as needed.

@Thomas S. that's exactly what I was leaning towards, thanks for the affirmation! So this won't need much renovation. After the seasoning period, would you cash-out refi to pay off the HELOC if it appraises for enough?

@Brian Kwan I used HELOC as down payment to purchase my duplex. I had \$25k cash sitting around, but I decided not to use it since that's my emergency fund (personal money).

Using HELOC fully to fund my down payment allows me to keep the books "separate". - so I can see how my investment is doing.

In your first post, you said you will have to pay \$250/month, if you use \$60k HELOC. Are you sure about this? As far as I know, most HELOC's requires 1% payment every month ~ \$600/month in your case.

To be honest, after I pulled \$80k HELOC and tried to pay it back. It's not easy. All of the reserves money for (capex, etc), I put it all in HELOC because I am trying to minimize the interest. - if I ever have to spend money on capex, or roof..in the next 1-2 years. I will definitely pull it out from HELOC again. Otherwise, I will take my chances and hope for the best.

My Heloc is almost done. \$20k left to pay (in credit card with 0% interest). After this, I can start accumulating my reserves.

I also put all my cash flow income to pay the HELOC down. every penny goes into it.

My strategy to minimize the interest is to open a Balance Transfer credit cards with 0% interest and \$0 fee. I opened 3 of these between me and my wife and transfer my HELOC to those cards.

Yes, it dinged my credit score pretty hard (went from Excellent to Poor in a like a week LOL). but for the last 15 months. I paid \$0 interest. (saved about \$5k in interest at least).

All my HELOC payments in the last 15 months went to Principal. Now my credit score is back up to the "very good" ratings.

Anyhow, just giving you ideas. I am not suggesting at all.

Good luck!

@Brian Kwan I would double-check with your CPA, but a vacation home is different from a rental property. If you used the HELOC to pay for your rental business activities, the interest would still be deductible on IRS Form Schedule E. The IRS example is for people using the HELOC to pay for non-income producing activities. The theory is that generating income typically generates more tax revenue for the government. Thus, those who engage in these activities should get a tax break on related expenses.
@Brian Kwan If your not in HELOC payback period (typically when HELOC expires after 3-10 years, depending on the program), I would absolutely refinance with a fixed rate conventional mortgage. Many people do this when applying the BRRRR strategy. After you refi, then rinse and repeat.

@Tony H. Wow thanks for your real-life example! Yeah, I don't have a 1% payment every month.. but valuable lessons in your scenario for sure. Makes sense that you'd want to keep the books separate. Thanks bud.

@Jibu V. That's interesting.. I'll do more research and make sure I'm doing things right. Thanks for clarifying the refinance with the fixed rate conventional mortgage- makes sense even if it lowers my cash flow.

@Brian Kwan If you don’t pay off your HELOC within the draw period, the terms for the payback period will likely be less favorable than a conventional 30 year fixed rate mortgage. So your cash flow will be even further hit at that point. I don’t remember if you mentioned, but if you choose to pay with the HELOC and not refinance, make sure your monthly payments include both principal and interest. Otherwise, you’ll be in no better position once the payback period hits.

@Jibu V. Good point, so just go ahead and start paying the Principal back from the start, using the cash flow. And then refinance. Makes a lot of sense!

Howdy @Brian Kwan

Remember, you are talking about repaying the HELOC and Cash Flow. What about the other loan to purchase the property? You would be actually paying on 2 loans. Refinancing should reduce the overall payment and not increase it.