My wife and I are (44 & 49 yo) have been looking into increasing our rental portfolio using the BRRRR method to help fund our retirement and hopefully help to gain financial independence from her W2 job. Over the years we have been taking the Dave Ramsey approach to try to pay everything off. UNTIL we read Rich Dad Poor Dad and started listening to the podcasts on bigger pockets and reading the forums. Here is a little bit about our situation-
We own 2 duplexes and 1 vacation/airbnb rental. The duplexes both have + cash flow and once paid off could give us around $60K a year in cash flow. Right now we have over $800/month from each duplex in cash flow. The vacation rental doesn't currently cash flow more than $100/month but we are hoping for equity in appreciation since it is in a prime ski town. One of the duplexes has around 250K of equity and the vacation rental has around 150K of equity. Our primary home has around $500K of equity in it at this time. We just purchased the 2nd duplex and are currently rehabbing one side to increase the equity in it. We have been looking at options and are having a hard time figuring out which way to move forward.
Should we cash out the first duplex at 70% so it would be around $150K and then put that into our own home so we have then take out a HELOC on our home which we think would allow us around $350-450K in funds to use from the HELOC depending on the amount of LTV ratio we can get.
IT seems like a good idea but I am a little nervous about the variability of HELOC's rates and wonder if it is just better to take out the $150K from the rental and then keep it in cash or something more liquid to use to buy properties with traditional loans and then have a lower amount in a HELOC from our primary home. What would be the advantage of putting the 150K in the HELOC that we would then have to pay interest on if we use it?
Any thoughts or advice from those with experience in the area would be greatly appreciated.
Updated over 1 year ago
Just to clarify- we are not looking to buy and hold with the HELOC but to buy, rehab, rent and then refinance with a traditional loan. The thought is to use the $ in the rental to pay down our primary loan so we have more available to use as a HELOC on our primary to buy this kind of property. Have people used this strategy and what are the thoughts on this.
HELOC won't be good option for you because you have planned to use these funds to buy this property and hold it. Cashing out from rental will give you higher interest rate and cashing out from primary will be lower interest rate. Do you have loan on primary?
Personally, I like the HELOC method. If you aren't using the HELOC, all that cashflow goes into your pocket.
I refi'd and got all the cash out. It took me 5 months to find another property... I paid the interest for it to just sit in my bank account instead of just being in a HELOC and collecting that cashflow.
Neither is bad and it depends on your end goals.
@Harjeet Bhatti - we have a loan at 3.5%. On our primary.
If we use the HELOC to buy, rehab, rent and then refinance to pay back HELOC would that make a difference about your thoughts on the scenario?
@Monte Blunk rehab would be good idea to use HELOC. You have good interest rate. I won't cash out from rental to pay off loan.
@Monte Blunk This is a common question investors find themselves asking as the equity position grows in their investments. The math will tell you to take the money on HELOC's or even cash our refinances because you can invest it at a higher rate of return via rental real estate. The numbers do not measure the risk because everyone has a different risk tolerance you are the only one that can decide if this a good fit for you.
I have taken HELOC's against a rental property to fund other projects, typically new construction deals, but have never pulled money against my primary. Fully understanding loans are loans, there is a difference in my mind between my primary and investment properties. A few things to consider -
If you take a HELOC against your primary home to buy rentals and later decide you want to move, your equity will be tied up potentially eating up your ability to put a down payment on another home - especially if values go the other way.
When you using a HELOC to fund purchases or the down payment on a new rental you are 100% financed, makes for a killer COC on return - but if values are flat or lower when the term expires on your HELOC it could leave you in a tough place.
Buyin more properties will increase the gross cashflow that will better support the goal of retiring from W2 but will increase the debt making it more difficult to pay off the portfolio when you really begin to enjoy the income. Based on your ages my approach would be more toward making a plan to purchase great properties now and have them paid off at or near retirement age.
I'm relatively new at this so other more experienced people may chime in with some other insight but...from what I have learned a HELOC is usually best used as a quick "buy like cash" approach.... its not usually used as a long term finance tool for a buy and hold type property. The HELOC allows you to buy quick when you find a deal, then get it rented out for some time and do "traditional" financing once you convince the bank its "seasoned" with cash flow etc. Or you used it to flip or BRRR where you are only going to be having a balance on the account until the property sells.
Using a HELOC for long term buy and hold seems like a bad and risky plan...variable interest rate..... if the market crashes your primary residence is tied to the rental property, so you could lose both etc.
That's my understanding of the "best" ways to utilize a HELOC
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