Better for BRRRR: HELOC or Cash?

11 Replies

Dearest BP Community - I come to you again for advice and a crazy check, so thank you ahead of time.

Here's my situation/question:

I own my primary residence in Fort Worth, Texas. It is worth 210k and I owe 162k, therefore I have about 23% equity in the property. For out of state folks who are not familiar with Texas HELOC rules, we have a regulation where your CLTVon your home cannot exceed 80%, meaning that today if I wanted to take out a HELOC on my home, I would only be given access to 3% of the equity (a disappointing $6000-ish).

I currently have around 50k liquid ready to deploy into real estate investments.

I'm looking for local Dallas/Fort Worth BRRRR opportunities as well as buying cheaper high yield turn-key deals in cash (50k-70k out of state houses yielding 12-15% in Indianapolis, Memphis, Pittsburgh, Detroit, etc)

Here's what I'm considering: what if I apply my 50k of cash towards the principal of my home, immediately reducing the balance of my primary mortgage down to 112k. I would then have around 46% equity in my home. Since the 80% CLTVTexas HELOC rule is in place, I could then have access to a $56k HELOC (210k value *.8 = 168k minus 112k balance = 56k). By taking a quick look at rates available for HELOCs in Texas, I could expect a variable interest rate around 4.25%.

I'm thinking this could be an advantageous move, because of the HELOC being a revolving line of credit. So if I were to use the entire 56k towards the purchase of a distressed property to BRRRR, I could recycle that cash to use it again as I pay it back (I pay back 5k, I can immediately use that 5k). Of course the disadvantage of this is that I'm paying 4.25% or so (it is a variable rate as apparently all HELOCs are) to be able to do this. The plan would be to basically use my HELOC as my new checking account, sending all of my direct deposits and income to this account (as explained in all of the 'pay off your mortgage in 5 years' videos).

OR - I keep my 50k in my accounts, and I use the pure cash to acquire a cheap distressed property to BRRRR. The advantage here is that since it's my own cash, my interest rate is 0%, BUT I have to wait until I sell or refinance (lets say 6-7 months down the line) before I can get at that cash again to use it/recycle it.

Part of me feels like I should just keep the cash and make smart BRRRR deals with it, and that I'd be sort of handcuffing myself and penalizing myself by directing it towards my mortgage/HELOC. The other part of me feels like it may be worth it because of the fact that I'd be able to access that cash again immediately as I pay it back, not having to wait for the refinance/sell day 6/7 months down the line.

Your thoughts? Has anyone else gone down this thought path? What am I not thinking about?

Last question: what if say 1 year from now, I move out of this primary residence and turn it into a rental. Can I continue to use the HELOC? Would it be due back immediately? Does any of this change if I do/don't deed the property to my LLCand keep as rental?

Thank you so much as always for your thoughtful responses.

Dave

@David Schulwitz i
The intent with a BRRR is to buy it Rehab it rent it and repeat. Your writings indicate your just looking to pay cash and have a property

The theory with brrr is you get it below market, fix it, rent it, way till it is seasoned (6-12 mos) then refinance it and get all your cash back because you have 20%+ equity in the deal

As an example I bought a condo for $70k, put $20k into it, rented it for $1500 and refinanced it as it appraised for $140k so I took a 90k loan to get my money out (don’t take extra but some may- personal preference).

Now I got my 90k cash back, so no cash in deal and rent is paying PITI + condo fees and still cash flowing $200.

@Chris Seveney Thank you for the response. Congratulations on your deal. I understand BRRRR, I'm just trying to invest with the cheapest and most easily accessed funds that I possibly can. If I can avoid using expensive hard money lenders as much as possible, that would be great.

If I could buy and rehab a deal in all cash, that would be great, but 50k isn't enough to do that in my area. I'm just wondering if I should apply the 50k liquid I have to my home mortgage, allowing me to get a 56k HELOC. If I'm thinking of this correctly, it would allow me to recycle the funds sooner because as you pay a HELOC back, those funds immediately become available to use again. By using 100% cash instead of a HELOC, I'm avoiding the interest, but my funds are locked up until I refinance/sell the property.

I would suggest using cash. If you have the money to pay the loan back, you have the money to use and no money wasted on interest payments. 

I might be missing something but upon first glance I can’t think of why you would pay down the mortgage only to go with a HELOC.

The big question is what is your interest rate on your mortgage. If it’s considerably higher than the heloc, then it would make sense to pay it down. But I doubt that’s the case. If it’s your primary residence it’s probably around 4%. And it’s fixed for 30 years. No reason to draw down heloc funds at a higher, variable rate.

It seems to me to be 6 of one, half dozen of the other, except you’re penalizing yourself with a high interest payment. Yes, the CREDIT immediately becomes available as you pay off a HELOC, allowing you to reuse it, but you’re going to waste a couple hundred dollars per month on interest payments as well, reducing your income’s buying power. I may be missing something but why add the extra step and expense of a HELOC? why not skip the middle-man and just buy in cash, and then instead of using your income to make interest AND principal payments on the HELOC to free up up more credit, now that income is just free cash flow that can be applied directly to the rehab costs, interest free.

Put another way, you say you have some form of income coming in, so why send that income through the creditor first, letting them take their share before you get to use it, instead of just applying the cash directly to the project?

Thank you all very much - I agree now too.  

@David Schulwitz
As others have said, just use the cash. Think of it this way, you’d rather use the bank as a bank, rather than using your PROPERTY as a bank.

Banks are used to store money, properties are used to store people :)

Good luck.

How would you be paying the HELOC back right away to have access to use the capital again?

Wouldn't you still need to wait until you can refinance the new BRRRR property to pay the HELOC off anyways?

Some good advice here already. Interesting question though, this is a new one for me. I am not really sure of the advantage of using the HELOC when you have cash that you would use for the same purpose unless you think you might be working on a second project simultaneously or shortly after your initial deal.

If you aren't thinking you'd be doing another rehab in the six month seasoning period, then the HELOC really wouldn't be of any benefit to you, you'd have no need for that cash until you can do the cash out refi anyhow. If you find a great deal, you might look in to delayed financing- it's possible to pull all of your cash out immediately after you close on an investment, but you have to fund the deal with 100% cash to qualify.

I don’t believe there is any circumstance where you should give a bank your $50k only to take it back with interest. I am sure you have figured that out now.

Cash is king - so make your down payment and keep the rest of your cash liquid while financing for your brrr some other way.

It Might cost you some interest, but you will have the liquid cash available to you for another downpayment on another deal.

If you use all your cash on one deal, you will own it, but will have nothing to start your next deal- which will inevitably present itself to you right after you spent all your money.

the cash out refi sounds sexy as hell, but I’ve had multiple occasions where I haven’t been able to get a cash out refi done - but I’ve refi’d plenty HML’s to long term.

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