HELOC, construction loan or use my cash for new build?

Question

I'm planning on building a $275K rental project starting in April 2019. I am conflicted about where is the smartest place to pull funds and would like opinions? I have $175 invested in stocks in my taxable account and another 30-50K in cash coming out of my business at year end. I could also do a HELOC at 5% (for about $150K) or get a construction loan at 6% and convert to fixed later.

If this were your project, how would you pull the funds?

Some of my assumptions:

1) The market will correct soon. If I need any cash out now, I should take it in September or October before the election

2) I did make gains on the investments so I'll need to pay tax on that. I'm in the 25% bracket. (This year I made 40% return and 15% over 5 years so I did really well)

3) My money in the market COULD keep earning above what I pay in interest? Maybe not if the correction is steep enough

4) Interest deductions are going away with new tax law correct?

THANKS! I love this group, Leanne

Account Closed · Answer

A few points on HELOCs vs. Construction Loans:

HELOC's are great for their low interest rate. If your current HELOC lender has an introductory rate you might even be able to raise the limit of your HELOC to enter into that promotional rate and lower it even more. If not it might be worth looking into going to another bank or CU that does have a promotional first year rate to open a new HELOC with.

Some other advantages or disadvantages of the HELOC could be that you wouldn't have a draw schedule or fund control requirement that you'd likely have with a construction loan, which can be laborious. On the other hand having a draw schedule and fund control with inspections before disbursements could be good if you're new to this as it could keep your contractors in line and it will force you to collect all the necessary paperwork in terms of Certificates of Insurance and W9's. It's a pain but it is another set of eyes on the building progress.

The construction loan is also likely to have an interest reserve so you're not making monthly payments on the money you're borrowing as well. Both the construction loan and the HELOC will only start accruing interest on the money used only when it's used. The HELOC I had had the option of paying 1% of the balance monthly or an interest only rate of $100. Be sure to look into those options.

Good luck!

Pavan Sandhu · Answer

Get the heloc. Don’t use it. Keep it for when you need it same with cash.

Leanne Pressly · Answer

Thanks guys-- this is helpful information! @Pavan Sandhu, Are you suggesting to split the costs into JUST HELOC and the balance into a Construction loan because you recommend not tapping into cash at all?

Pavan Sandhu · Answer

keep your cash on hand for as long as possible. Leverage debt.

Pavan Sandhu · Answer

Get the heloc as fast as you can then work on that construction loan.

HELOC, construction loan or use my cash for new build?

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