This may be the type of question a few of you may call me an idiot for asking, but give me some slack here, this is my first ever investment property. I have been searching around Bigger Pockets and asking friends/coworkers and cannot get a good straight forward answer to this question. I am in the final steps (and paperwork) for buying a duplex using cash. I want to use that property to not only generate income but also leverage the equity in it to buy another rental property. I am very new to investing, but my decided niche (for now) will be buy and hold small multifamily homes. I want to know what people think on either pulling a HELOC on this home (I will not live in it so a 70% value is best I can get) or doing a Cash Out Refi on this home. Here is where I struggle. If I do a Cash Out Refi the monthly payments would be higher than a HELOC. The money saved on the HELOC allows me to build more capital for another purchase at a higher price point faster (and having less debt). I also like the idea of not being locked into a principle+interest payment each month (in-case of vacancy). A Cash Out Refi should offer me more cash up front allowing me to buy at a higher price point right away, but down the line I am worried about issues of holding more than 4 mortgage loans and the increased cost of a portfolio lender. Any ideas/advice?

Cash out Refi vs HELOC?

Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes

9y

Daren,

Not a silly question / issue at all and something that many investors struggle with. It may not help but I think you have articulated most of the considerations quite well; Flexibility vs. High(er) Leverage.

At the end of the day, a personal decision.

2 Reply

Daren D Wagner

OP

Rental Property Investor · Salt Lake City, UT · Member since 2017 · 15 posts · 8 votes

9y

Would you think differently if I told you I did or did not have my next property in mind to purchase? Would either change your viewpoint?

Thanks

0 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Daren D Wagner I am a big proponent of HELOC investing if you can get a large enough line of credit and you are fiscally disciplined. The fact that you can act like a cash buyer and also take your time to shop for standard loans AFTER the purchase is a great relief, at least for me in a hot market like the SF Bay Area.

2 Reply

Daren D Wagner

OP

Rental Property Investor · Salt Lake City, UT · Member since 2017 · 15 posts · 8 votes

9y

Originally posted by @Arlen Chou:

@Daren D Wagner I am a big proponent of HELOC investing if you can get a large enough line of credit and you are fiscally disciplined. The fact that you can act like a cash buyer and also take your time to shop for standard loans AFTER the purchase is a great relief, at least for me in a hot market like the SF Bay Area.

**Great point Arlen! Do you then after the purchase do a Cash-Out-Refi and pay off the LOC right away?

0 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Daren D Wagner it really does not have to be right away. In my case my interest rate on my HELOC is prime minus 1%. It is way better then anything else I could find. Therefore, I take my time to look for the best rate and terms for a loan on the building. I then uses those funds to pay down my HELOC so I can start looking for another property and look like a cash buyer again.

1 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Arlen Chou:

@Daren D Wagner it really does not have to be right away. In my case my interest rate on my HELOC is prime minus 1%. It is way better then anything else I could find. Therefore, I take my time to look for the best rate and terms for a loan on the building. I then uses those funds to pay down my HELOC so I can start looking for another property and look like a cash buyer again.

So is the main advantage of the HELOC in your case the fact that you aren't taking the money out and paying higher interest until you have already found a deal and closed on it? You mentioned you pay down the HELOC once you do cash out refinance. Why not pay it off completely?

0 Reply

Daren D Wagner

OP

Rental Property Investor · Salt Lake City, UT · Member since 2017 · 15 posts · 8 votes

9y

Great point. The the LOC can be used for another purchase in cash. Thanks!

0 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Brian Garrett it really depends on what you can do with your property and how much you can get back out. You need to be able to reposition your building and drive up the value of the property. Normally you will only be able to get a LTV of 60%-70% depending on your lending agency. If everything goes well: you bought the property a good price, drive the value of the property high enough through rent increases, you will be able to get a new loan high enough to pay off the original purchase price. However, if you do not have enough value in the building then you will not get enough to pay off the entire HELOC. Therefore, I use the term "drive down" because it depends on how far you can push it down... maybe to zero maybe not, depends on each deal.

2 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Brian Garrett sorry, I did not answer the first part of your question. For me, the bigger advantage is that you "look like" a cash buyer when you make the offer. That might not be a big deal in some markets, but in hot markets it makes quite a bit of difference. The seller does not have to wait for you to get "approved" for a loan. You are able to close much faster and take a stronger position in a bidding war.

2 Reply

Taye N.

Hayward, CA · Member since 2009 · 258 posts · 62 votes

9y

If you cash out and refi, 1. Wouldn't you monthly payment go up? 2. Interest are steadily increasing what if you have a good rate, refi is higher. Is it still worth it? I guess you beed to draw your money out some how.

0 Reply

Meghan McCallum

Specialist · CHICAGO · Member since 2015 · 680 posts · 650 votes

9y

Cashing out is advantageous IF your lender is willing to cash out ALL but 25% equity. My bank will now do that for me and even hand me cash above what I put in it as I have a track record of success...hence tax free $ to live off of...so my business only pays me $13k as a full-time employee. SO, I live off tax free money I have made rather than 15% taxed passive income. I am in a location where I am able to find deals that work like that. Then, rent for one year, sell it (soft flip). Pay 15% taxes on the sale rather than the 35% based on self employment taxes that most flippers pay.

The difference between the rich and poor is the poor pay all the taxes and the rich pay nearly nothing.

4 Reply

Javier Marchena

Investor · Winter Springs, FL · Member since 2010 · 165 posts · 68 votes

9y

Cash out refinance worked for me. Buying cash below market, doing some renovation got the property to appraise much more that I spend on this property. Doing a cash out at 70% appraised value, I received more cash that I put in.

I prefer cash out because fixed interest rate and I can go 30 years if I want to.

1 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Arlen Chou:

@Brian Garrett it really depends on what you can do with your property and how much you can get back out. You need to be able to reposition your building and drive up the value of the property. Normally you will only be able to get a LTV of 60%-70% depending on your lending agency. If everything goes well: you bought the property a good price, drive the value of the property high enough through rent increases, you will be able to get a new loan high enough to pay off the original purchase price. However, if you do not have enough value in the building then you will not get enough to pay off the entire HELOC. Therefore, I use the term "drive down" because it depends on how far you can push it down... maybe to zero maybe not, depends on each deal.

Makes sense but I thought the LTV you can take out was usually more like 70-80%?

0 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Arlen Chou:

@Brian Garrett sorry, I did not answer the first part of your question. For me, the bigger advantage is that you "look like" a cash buyer when you make the offer. That might not be a big deal in some markets, but in hot markets it makes quite a bit of difference. The seller does not have to wait for you to get "approved" for a loan. You are able to close much faster and take a stronger position in a bidding war.

So basically you're saying with the cash out refinance you can't pull enough out to be a cash buyer whereas with the HELOC you can represent yourself as such. Is that the gist of it?

0 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Meghan McCallum:

Cashing out is advantageous IF your lender is willing to cash out ALL but 25% equity. My bank will now do that for me and even hand me cash above what I put in it as I have a track record of success...hence tax free $ to live off of...so my business only pays me $13k as a full-time employee. SO, I live off tax free money I have made rather than 15% taxed passive income. I am in a location where I am able to find deals that work like that. Then, rent for one year, sell it (soft flip). Pay 15% taxes on the sale rather than the 35% based on self employment taxes that most flippers pay.

The difference between the rich and poor is the poor pay all the taxes and the rich pay nearly nothing.

Can you explain this strategy in a little more depth? I'm not following the "tax free" living and the 15% versus 35% tax comparison. Thanks Meghan!

0 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Javier Marchena:

Cash out refinance worked for me. Buying cash below market, doing some renovation got the property to appraise much more that I spend on this property. Doing a cash out at 70% appraised value, I received more cash that I put in.

I prefer cash out because fixed interest rate and I can go 30 years if I want to.

Would love to hear the numbers and nitty gritty of your deal if you don't mind sharing. Feel free to PM me if you'd rather not post details publicly. Thanks Javier and great job!

0 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

9y

@Brian Garrett neither a refi and a HELOC will give you 100% of the value of your home. How much you get out will depend on your lender. In both cases you will have the cash before you find your property. However, the big difference is that for the HELOC you only need to go through the qualification process one time prior to purchase. You can reload it at your own pace and not have to worry about additional loans PRIOR to a purchase.

As an example: I pulled a "first position" HELOC on my primary residence wrapped with another property. This gave me a loan amount that paid off my primary AND also gave me enough to purchase a 6 plex. The income of the 6 plex pays down the HELOC at a faster rate then my original 30 fixed rate. Essentially moving the entire loan of my primary to my new rental building. Keep in mind that the new property is cash flow positive AND I still get the home owner tax deduction because the HELOC is on my primary.

After re-positioning, I am now in the process of looking for a stand alone commercial loan for the rental. I will pay off the HELOC and have that money available for the next purchase. At that point, with the HELOC active loan amount at zero, I will have taken all of the loan off of my primary residence, but have access to a large amount of essentially tax free money to use on renovations or additional rentals.

At this point, there is no pressure on me to find a deal, find a loan or make any hasty decisions. Additionally, my loan on my primary is gone, I have positive cash flow and I still get the tax benefits...

7 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Arlen Chou:

@Brian Garrett neither a refi and a HELOC will give you 100% of the value of your home. How much you get out will depend on your lender. In both cases you will have the cash before you find your property. However, the big difference is that for the HELOC you only need to go through the qualification process one time prior to purchase. You can reload it at your own pace and not have to worry about additional loans PRIOR to a purchase.

As an example: I pulled a "first position" HELOC on my primary residence wrapped with another property. This gave me a loan amount that paid off my primary AND also gave me enough to purchase a 6 plex. The income of the 6 plex pays down the HELOC at a faster rate then my original 30 fixed rate. Essentially moving the entire loan of my primary to my new rental building. Keep in mind that the new property is cash flow positive AND I still get the home owner tax deduction because the HELOC is on my primary.

After re-positioning, I am now in the process of looking for a stand alone commercial loan for the rental. I will pay off the HELOC and have that money available for the next purchase. At that point, with the HELOC active loan amount at zero, I will have taken all of the loan off of my primary residence, but have access to a large amount of essentially tax free money to use on renovations or additional rentals.

At this point, there is no pressure on me to find a deal, find a loan or make any hasty decisions. Additionally, my loan on my primary is gone, I have positive cash flow and I still get the tax benefits...

Thank you Arlen it makes more sense to me now. Appreciate the breakdown!

1 Reply

Peter TverdovBusiness Member

Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes

9y

I prefer HELOCs. I have or will have HELOCs on all of my properties. I use them like a CC. YES, I understand the rates are variable but I work to pay them down quickly, then I can use them again once the balance is at 0. The great thing with a HELOC vs a CORF is my mortgage payment does not go up and on HELOC it is typically interest only payments for 5-15 years. I pay huge chunks of my HELOC balance each month, but if there is a month where something big happens where I can't do that, I just make the minimum payment that month. Once my HELOC is paid back...guess what? I can use it again. Can't do that as easily with CORF.

[email protected]732-289-3823

2 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Peter Tverdov:

I prefer HELOCs. I have or will have HELOCs on all of my properties. I use them like a CC. YES, I understand the rates are variable but I work to pay them down quickly, then I can use them again once the balance is at 0. The great thing with a HELOC vs a CORF is my mortgage payment does not go up and on HELOC it is typically interest only payments for 5-15 years. I pay huge chunks of my HELOC balance each month, but if there is a month where something big happens where I can't do that, I just make the minimum payment that month. Once my HELOC is paid back...guess what? I can use it again. Can't do that as easily with CORF.

What are the typical terms of a HELOC compared to a CORF? Just for comparison sake.

0 Reply

Peter TverdovBusiness Member

Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes

9y

Originally posted by @Brian Garrett:

I prefer HELOCs. I have or will have HELOCs on all of my properties. I use them like a CC. YES, I understand the rates are variable but I work to pay them down quickly, then I can use them again once the balance is at 0. The great thing with a HELOC vs a CORF is my mortgage payment does not go up and on HELOC it is typically interest only payments for 5-15 years. I pay huge chunks of my HELOC balance each month, but if there is a month where something big happens where I can't do that, I just make the minimum payment that month. Once my HELOC is paid back...guess what? I can use it again. Can't do that as easily with CORF.

What are the typical terms of a HELOC compared to a CORF? Just for comparison sake.

I would say Investment Property HELOCs can go up to 6-6.5% right now. Primary residency the rates are in the 2s or 3s. CORF likely add .5% to the 30 year mortgage. Rates are better on a CORF if you have multiple HELOCs, but you only get to use a CORF once. If you want to use that money again, you have to go through the whole refinance process again, pay closing costs, etc...not to mention you increased your mortgage payment on that property and decreased your cash flow.

The only thing I have to worry about with a HELOC is paying down the principal fast and watching interest rates. It works for me, may not work for others.

[email protected]732-289-3823

4 Reply

Brian Garrett

Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes

9y

Originally posted by @Peter Tverdov:

Originally posted by @Brian Garrett:

Originally posted by @Peter Tverdov:

I prefer HELOCs. I have or will have HELOCs on all of my properties. I use them like a CC. YES, I understand the rates are variable but I work to pay them down quickly, then I can use them again once the balance is at 0. The great thing with a HELOC vs a CORF is my mortgage payment does not go up and on HELOC it is typically interest only payments for 5-15 years. I pay huge chunks of my HELOC balance each month, but if there is a month where something big happens where I can't do that, I just make the minimum payment that month. Once my HELOC is paid back...guess what? I can use it again. Can't do that as easily with CORF.

What are the typical terms of a HELOC compared to a CORF? Just for comparison sake.

I would say Investment Property HELOCs can go up to 6-6.5% right now. Primary residency the rates are in the 2s or 3s. CORF likely add .5% to the 30 year mortgage. Rates are better on a CORF if you have multiple HELOCs, but you only get to use a CORF once. If you want to use that money again, you have to go through the whole refinance process again, pay closing costs, etc...not to mention you increased your mortgage payment on that property and decreased your cash flow.

The only thing I have to worry about with a HELOC is paying down the principal fast and watching interest rates. It works for me, may not work for others.

Thanks for sharing Peter I appreciate your feedback.

1 Reply

Cristian Chacon

Longmont, CO · Member since 2017 · 1 post · 1 vote

8y

This is great information thanks for everyone!

I discovered that Wells Fargo has a Fixed Rate Advance HELOC option that allows you to keep your current HELOC rate (if you have one and if this rate is favorable compared to current rates), and redraw your HELOC to the full amount of appreciated value in your property, so the "LTV" on the HELOC would be 100%.

If you don't already have a HELOC, the option starts you with fixed rates between 4-7% depending on the length and principal of the LOC.

One factor to consider is that the re-draws take about 2-8 weeks to process. Additionally, you have the option to choose your amortization as being full or partial. I’d recommend full amortization so that you aren’t subject in variable rates and don’t set yourself up for a balloon payment at the end of the term.

Here is a link to more details on the program.

Has anyone heard of anything similar?

1 Reply

Veronica Haniger

Santa Cruz, CA · Member since 2019 · 18 posts · 16 votes

7y

Originally posted by @Arlen Chou:

@Brian Garrett neither a refi and a HELOC will give you 100% of the value of your home. How much you get out will depend on your lender. In both cases you will have the cash before you find your property. However, the big difference is that for the HELOC you only need to go through the qualification process one time prior to purchase. You can reload it at your own pace and not have to worry about additional loans PRIOR to a purchase.

As an example: I pulled a "first position" HELOC on my primary residence wrapped with another property. This gave me a loan amount that paid off my primary AND also gave me enough to purchase a 6 plex. The income of the 6 plex pays down the HELOC at a faster rate then my original 30 fixed rate. Essentially moving the entire loan of my primary to my new rental building. Keep in mind that the new property is cash flow positive AND I still get the home owner tax deduction because the HELOC is on my primary.

After re-positioning, I am now in the process of looking for a stand alone commercial loan for the rental. I will pay off the HELOC and have that money available for the next purchase. At that point, with the HELOC active loan amount at zero, I will have taken all of the loan off of my primary residence, but have access to a large amount of essentially tax free money to use on renovations or additional rentals.

At this point, there is no pressure on me to find a deal, find a loan or make any hasty decisions. Additionally, my loan on my primary is gone, I have positive cash flow and I still get the tax benefits...

Thanks so much for diving into this. I'm currently in the process of pulling a HELOC on my duplex here in the Bay Area and using it to start investing. I read your post a few times last night (some of us take more time!) and it helped me so much as I thought through things this morning. Excited to get started!

0 Reply

Arlen Chou

Investor · Los Altos, CA · Member since 2014 · 942 posts · 1k+ votes

7y

@Veronica Haniger The strategy has helped me purchase several properties over the past few years. I am glad to hear that my post helped you! Feel free to reach out if you have more questions or you want to discuss the strategy in more detail.

Good luck!

0 Reply

Cash out Refi vs HELOC?

Cash out Refi vs HELOC?

Most Popular Reply

26 Replies