Sell, Heloc, or cash out refinance?

Question

Hello all, First time poster here. Im trying to decide my best course of action to get into the rental game, but also need a larger house for my wife and 4 kids. Have alot of equity built up in our small home so debating if I should just sell it, take out most of the equity on a cash out, or take a line of credit interest rates are about the same but 15year max term on line of credit. I tend to hear more people take the cash out refinance option when keeping a property as a rental is this just to keep the payments lower or are there other benefits? My goal would be to put 20-30k into existing home, have money for the down-payment on the next as well as rehab money. Any advice would be greatly appreciated! Thanks!

Peter Falk · Answer

Hi Ryan, I am not sure how urgent moving your family to a larger home is.  If that is a high priority, would start by talking with your lender, if you liked working with them, on how your finance options would look with debt to income holding the current home as a rental to help cover that mortgage along with your new home.  I'd also look into the rental market for your home and see how much cash flow you think you can get.  If you do have a low interest rate, that will help.  I'm in Madison as well, and single-family homes have been good stable long-term investments, but the high prices generally make cash flow challenging, and why our single-family rental inventory is pretty slim.  There does seem to be a growing furnished month to month rental segment help get higher rents, but at some point will have enough supply of those.  If you decide your current home as a rental would be too much of a drain on expenses, could then sell it, buy your larger home and then figure out buying a multi-unit for more cash flow.  Happy to talk more about my experience in the area if you like.

Paul Novak · Answer

Ryan,

This is a highly personal question and if we were talking face to face about this, I would want to know what your long-term goals are.  That would impact what advice I would give.  Do you plan to get just one rental, are you going to continue to scale?  How old are you now and when do you plan to retire?  What is your current margin on with your income in relation to your expenses?  Without having that I will provide advice based on what I would do if I was in your situation.  I will also caveat my response by saying I am a relatively conservative investor with strong household W2 income and a high savings rate.

I would want to hold on to the current loan on the small house and not refinance it for two reasons.  I am assuming that the property is financed as a primary residence and not an investment property.  This is a key distinction because rates for a primary residence are lower than an investment property.  Once you have lived there for more than a year you can keep the loan in place and rent it out and you are fine.  I am also going to assume that you have a low interest rate on this property if you have had it for a while.  I wouldn’t want to give up that interest rate.  If you want to get into rentals, especially your first one, generating cash flow is key.  I don’t just want you to get in but I want you to have staying power.  I found that my cash flow was most important on my first property because if an issue occurred or I had vacancy there weren’t other properties to smooth out the losses.  Now having 6 properties, 8 doors, the cash flow isn’t as critical because if something breaks or I have vacancy in one unit the other properties can prop up the underperforming one for the month and I am still cashflow positive each month just not as positive as I would have been if I didn’t have any issues.  With one property, when issues occur those expenses most likely are coming out of your pocket or your cash reserves.  My fear in refinancing the equity out of the property is it will increase the total balance on the new mortgage and if that comes with a higher rate it will eat into your margines.  My goal is always to cashflow, without looking at vacancy, repairs, and Cap Ex, a minimum of $500 per property.

Now comes the next issue, if you don’t sell or refinance your current property how do you get the cash for the downpayment on a new property?  I am assuming that you will turn your current property into a rental and then will purchase the bigger house for your family.  The first thing I would focus on is your savings rate, trying to save up the new property downpayment.  I know this isn’t exciting and takes time but it’s how I would try to do it.  If I was impatient, which I tend to be, I would look at taking out a 401k loan for the downpayment on the new property and pay myself back over time.  I like this option because you pay yourself back the interest vs. giving it to the bank.  I have done this multiple times to scale our portfolio.  The next option I would investigate is a HELOC on your current property to access the equity without giving up the current mortgage rate.  I don’t like this option because you are going to lose out on all the interest, but it allows you to make the move faster.  You then still need to focus on your savings rate but instead of putting it in a savings account it would go each payday to the HELOC until it was paid off.

I have personally done all of these over the past few years.  I got started by doing a cash out refi on my primary residence going from a 15-year mortgage to a 30-year locking in at 2.85% and keeping my monthly payments the same while pulling out $111K of equity.  I have also used my savings for downpayments on additional properties.  Next, I pulled out 401K loans and paid myself back.  Lastly, I have a HELOC I have borrowed from for properties or used private money from friends as a way to come-up with downpayments.

The key I have found to make this work goes back to your savings rate and ability to create margin.  Many people will say you need to have cash reserves when going into real estate and I don’t disagree however if you don’t have margin how do you replenish those reserves as they start to deplete?  To continue to buy more property and sustain the property you have it takes cash which for me has come from my savings rate.  Even if I get impatient and borrow to get into my next property sooner than if I had just saved up for it organically, I am still using that savings rate to then pay back the new debt I just acquired to fund my downpayment.

I hope this helps.  If you have more questions, feel free to reach out.  I am an investor in Sheboygan County here in Wisconsin and have been at it for about 4 years.  I love helping people get started.

Alan Asriants · Answer

Hey Ryan, taking out a HELOC is better for quick turnaround projects, typically not advised to fund long term retnal properties. HELOCs work great for flips, wholesale deals, etc. They also work great if there are some things you need to repair asap and don't have the cash to do so - IE roof.

Most people will do a cash out refi, rent out the old house and then use the funds they pulled out to buy another property. Why this is better than a HELOC for most? A cash out refi gives you a fixed 30year loan typically that doesn't chagne with the market. If rates go up, you are protected, if rates go down you can refi. Its the safer approach. Heloc rates change with the market. So if there are major upswings in rates, your cash flow and returns can be affected heavily.

If its possible, I would likely do both. Do the cash out refi to put that money into the next property at a fixed rate - make sure you're not taking out too much that you can't cash flow, and once you buy your next home, look into opening a LOC. This way you have the HELOC as emergency funds, or quick flip funds. A heloc is cheaper than getting hard money!

The reason I would do HELOC after the purchase of the next home is because you might increase your DTI too much. Talk to a reputable lender and a local agent before making any moves and do whats best for your scenario.

Caleb Brown · Answer

Personally I would keep the starter home but not touch the equity to up size your house. Save up the down payment separately to use on your new personal home. Yes you could do a refinance and take the equity to put towards another home. If you do leverage the equity with debt make sure to run numbers to see your cashflow. When you leverage your equity your margins will get slimmer. One other tid bit, have reserves. If you are going to move into a bigger home (higher cost of living), leverage the equity and own a rental you need a nest egg.

Ricardo R. · Answer

Hey Ryan,

Good question — you’re thinking about it the right way, weighing your options before jumping in. The best move depends on whether you want to keep your current home as a rental or cash out and reset clean with the next one.

If you want to keep it, a cash-out refinance usually makes the most sense. The big benefit over a HELOC is that it locks in a fixed rate and stretches your payments over 30 years instead of a 15-year draw/repay period. That lower payment makes the property way easier to cash flow once it’s rented. Plus, refis free up a lump sum you can use for the down payment on your next house and some light rehab — exactly what you mentioned.

The downside is you’re resetting your mortgage and eating closing costs again (usually around 2–3% of the loan amount). But if your current interest rate is low, you might consider a second-position HELOC just for the renovation/down payment money — especially if you plan to refinance later when rates drop.

If you sell instead, it’s simple — no debt juggling — but you’ll lose the chance to hang on to a property that could cash flow and appreciate long term.

Here’s my quick example:
Say your house is worth $300K and you owe $150K — that’s $150K equity.

• Sell: maybe walk away with $135K after closing.
• Cash-out refi to 75% LTV: new loan about $225K, gives you roughly $75K cash out after payoff and fees — enough to update your current place and put down 10–15% on the next one.

Sell: maybe walk away with $135K after closing.

Cash-out refi to 75% LTV: new loan about $225K, gives you roughly $75K cash out after payoff and fees — enough to update your current place and put down 10–15% on the next one.

If your current home rents well after the upgrade, that’s the smarter long game.

If not, selling might be cleaner — take the win, roll it forward, and buy the bigger place plus a rental later when you’re not juggling two moves and four kids.

You’re thinking like an investor already, though — run both versions in a simple spreadsheet and see which one gets you closer to your cash flow or portfolio goal; Ryan, I really hope this helps you a bit, I sent you a DM on BP... it's one of the reasons I do this, I hope you can assist. Thank you in advance.