Pay Down Heloc or hold onto cash?

Question

What should I do? I have a $100k heloc. In August i bought a rental property for $45k. (its performing well) Currently there is a balance of $40k against my heloc. I am planning to scale and to possibly buy 2 more properties in 2021. (2 properties for 100K or less). I am sitting on about $27k of my own cash. I really like the idea of putting that $27k towards the principal of my heloc to try to pay it off to start fresh again with $100k. However, I am nervous because it is not like I make a lot of $$ and will have $27k again in a few months. I always hear that it's best to hold on cash and to leverage your assets which i did with getting a heloc but I do want to pay it off to leverage it again in 2021. Is this the right move? I would love to hear of all your strategies.

Joe Splitrock · Answer

@Tyler Bettencourt I am in a similar situation. We purchased in September using our HELOC. We have been paying interest only on the HELOC since we closed and letting cash accumulate. We are going to refinance on of our existing rentals and take cash out to pay off the HELOC. Basically that will roll two properties into one loan at 2.75%. The HELOC will be paid off and ready for the next deal without us using our cash to pay it off.

Part of the answer for you depends on these two questions:

1. What is the interest rate of your HELOC?  What return are you getting on your cash? Comparing the two tells you how much you are "paying" for that cash sitting in your account.

2. For the purposes of investing, does it matter if you use cash or you get cash from your HELOC? If it doesn't matter, might as well pay off the HELOC and save some interest while you wait.

Jerry Lucker · Answer

I would keep as much HELOC money working as possible. I wouldn't be surprised to see a repeat of what happened 12 years ago. Many lenders quit and even canceled HELOCS across the board, even if there were no missed or late payments. Hundreds of thousands of dollars that were available for investments disappeared overnight!

Tyler Bettencourt · Answer

Thanks @Brian Gerlach. I have 2 rental properties and the 27k was excluding my reserves. My plan is get 2 more. Thanks for the input, I've just been going back and forth with what to do with the extra cash. Either way It will need to be spent since I only have 60k left in my heloc.

Brian G. · Answer

@Tyler Bettencourt keep a healthy cash reserve always. If you were to pay $27k down on the Heloc what happens if they close your Heloc? You’re screwed, ie no reserves. They can do that at any time, though it would be unusual they have that control. Now if you want to choose an amount to keep in reserves ($10k is reasonable if you only have 1 property imo) and then throw every dollar above that amount toward paying off the Heloc then that could make sense. Have healthy cash reserves. Always.

Tyler Bettencourt · Answer

Hello @Joe Splitrock my interest rate is 4.5% The property sold for $45k and I've already paid off 5k so I owe $40k. The property rents for $775 a month.

To Answer your second question it doesn't matter if I use cash or get cash from my Heloc. Paying down my heloc gives me a bit more piece of mind even though I'll draw from it again significantly in 2021.

Pay Down Heloc or hold onto cash?

Most Popular Reply