Refi pull money out Vs HELOC

[Kevin Clayton]

Looking at finance options to leverage an investment property. Creating an LLC to transfer the property into and looking to build credit/ establish the loan via the LLC. As rates rise I'm wondering if it makes more sense to refi and pull the entire amount for future projects (around 200k) or setup at HELOC. From my understanding the loan will be fixed and but points will be added because Its an investment property and money is being pulled out. This brings up the monthly considerably as the project will be a year or so till cashflow come from the investment Vs the HELOC - only pay on money being used could potentially have a lower interest rate but more of a hassle if the HELOC is paid off/rolled into loan later or rates rise.

Two projects (ADUs) will take 6 months to a year to complete. 

I’ve been a. Member foe a while. Looking to engage more with the community as I work on
my next investment goals.

Thank you. 

[Rodney Sums]

Quote from @Kevin Clayton:

Looking at finance options to leverage an investment property. Creating an LLC to transfer the property into and looking to build credit/ establish the loan via the LLC. As rates rise I'm wondering if it makes more sense to refi and pull the entire amount for future projects (around 200k) or setup at HELOC. From my understanding the loan will be fixed and but points will be added because Its an investment property and money is being pulled out. This brings up the monthly considerably as the project will be a year or so till cashflow come from the investment Vs the HELOC - only pay on money being used could potentially have a lower interest rate but more of a hassle if the HELOC is paid off/rolled into loan later or rates rise.

Two projects (ADUs) will take 6 months to a year to complete. 

I’ve been a. Member foe a while. Looking to engage more with the community as I work on
my next investment goals.

Thank you. 

What are the exact terms of the HELOC you qualified for, especially as it relates to the rate and it rising?

Also from your perspective and research, what made the two ADUs better than buying a resale, especially with that kind of money?  This is not saying the ADUs aren't better, just curious what made them better.

[Scott E.]

This question comes up a lot. It comes down to personal preference. Plus a big factor is how quick you'll be able to pay down that HELOC if you use a HELOC.

My preference would be to use the HELOC at a lower rate, pay it off as fast as possible, then deploy those HELOC funds into another deal.

[Kevin Clayton]

Quote from @Rodney Sums:

Quote from @Kevin Clayton:

Looking at finance options to leverage an investment property. Creating an LLC to transfer the property into and looking to build credit/ establish the loan via the LLC. As rates rise I'm wondering if it makes more sense to refi and pull the entire amount for future projects (around 200k) or setup at HELOC. From my understanding the loan will be fixed and but points will be added because Its an investment property and money is being pulled out. This brings up the monthly considerably as the project will be a year or so till cashflow come from the investment Vs the HELOC - only pay on money being used could potentially have a lower interest rate but more of a hassle if the HELOC is paid off/rolled into loan later or rates rise.

Two projects (ADUs) will take 6 months to a year to complete. 

I’ve been a. Member foe a while. Looking to engage more with the community as I work on
my next investment goals.

Thank you. 

What are the exact terms of the HELOC you qualified for, especially as it relates to the rate and it rising?

Also from your perspective and research, what made the two ADUs better than buying a resale, especially with that kind of money?  This is not saying the ADUs aren't better, just curious what made them better.

Great question. At this point I have not sought financing so I don’t know the specific terms. In the past I have used a HELOC and recently pulled money out of my house to invest. Both have advantages and disadvantages. I wanted to put the question out to get investor/ finance perspectives and I prepare to make the move.

Great question about resale. It came from one of the bigger pockets podcasts. Using the 1 percent rule as a guide for investment……in Los Angeles the rule doesn’t work because property is so expensive, however, ADU’s, create the opportunity to building on existing land (if someone owns an investment property or home). In this case, applying the 1 percent rule works. From my limited experience and vantage point this option provides the best ROI. 

there are are great opportunities on the purchase side that would require a bit more tine and money. With the effects from the moratorium, rent control, and other pieces that aren’t advantageous for owners, finding the right property could take more time and effort. I’m the meantime, two ADU opportunity’s seem like the best best move for my current situation. 

[Kevin Clayton]

Quote from @Scott E.:

This question comes up a lot. It comes down to personal preference. Plus a big factor is how quick you'll be able to pay down that HELOC if you use a HELOC.

My preference would be to use the HELOC at a lower rate, pay it off as fast as possible, then deploy those HELOC funds into another deal.

Great point, paying down the HELOC is key and I don’t have that answer at the moment. I need to take a harder look at how I could do that. I’m guessing on once the investment is maid and the equity in the property goes higher the property could be refinanced to payoff the HELOC. Freeing up the money for the next investment. What would you suggest as a strategy for paying off the HELOC as fast as possible? 

[Nicole Heasley Beitenman]

Because a HELOC can be used over and over again and has no payment when it isn't being utilized, it typically gets my vote.

[Kevin Clayton]

Quote from @Nicole Heasley Beitenman:

Because a HELOC can be used over and over again and has no payment when it isn't being utilized, it typically gets my vote.

That makes sense. I used a HELOC years ago and was not thinking as an investor. Some of my not so great decisions are sneaking into my future thoughts about using a HELOC. Namely, the adjustable rate.... In this case, it's for an investment that will provide enough return to pay down or paid off the HELOC for reuse at a later date. Hopefully 6-8 months down the road.

[Andrew Garcia]

Hi @Kevin Clayton, if you are going to be able to pay off the HELOC in a short period of time, I encourage you to go that route.

However, it seems that you are funding construction projects (ADUs) with the funds. This is an inherently long-term deployment of your assets unless you plan to sell or refinance.

If you plan to refinance, I would just refinance now to have greater certainty. If rates go down in 6 months, you can refinance again. If rates go up, you still have the equity that you currently have in the property to allow you to do a HELOC if you so choose. It also allows you to lock in a rate that is lower than you would have gotten if you had done a HELOC into a refi.

Hope this helps! Let me know if I can be of any assistance.

[Nicole Heasley Beitenman]

Quote from @Kevin Clayton:

Some of my not so great decisions are sneaking into my future thoughts about using a HELOC. Namely, the adjustable rate.

In an adjustable rate scenario, I advise running the numbers at the highest possible rate the HELOC can reach; there's a cap on these, to my knowledge. If the deal still works at the worst rate possible, it's a green light.

[Robert Reynolds]

I recently just pulled money out of my house using the HELOC to build an ADU in Los Angeles. I prefer the HELOC for short term needs, like building ADUs, and I like that you can just keep paying it back and reusing it as you want. With the refi you will be paying it back for the next 30 years, unless you pay extra towards the principal. I recommend talking to an investment friendly loan broker, I have some recommendations if you'd like.

My only regret in building the ADU, is I hired a bad contractor who has taken a whole year to finish my ADU. Please vet your contractor, and if you have a good one please send him my way! I could have used that $150k to put 20% down on a $750k investment property that would have appreciated a ton, brought me cashflow and loan buy down this past year. That's one thing to consider when thinking of building an ADU vs buying an investment property.

[Alex Hunt]

This is a good debate here, but have to consider other financing options as well. Consider a bridge option as well, it will allow you pay interest only and have the funds set in a construction reserve and to be released on a scope of work/ draw schedule of your choosing. Also not paying interest on any unused amounts. On a 6-24 month term which can be done under the business. Touching on the comment regarding the loan being higher if you decided to cashout, depending on where you get the loan it can be as little as 0.25% higher 

[Kevin Clayton]

Quote from @Nicole Heasley Beitenman:

Quote from @Kevin Clayton:

Some of my not so great decisions are sneaking into my future thoughts about using a HELOC. Namely, the adjustable rate.

In an adjustable rate scenario, I advise running the numbers at the highest possible rate the HELOC can reach; there's a cap on these, to my knowledge. If the deal still works at the worst rate possible, it's a green light.

That's a great point. I didn't realize there may be a cap on the HELOC interest rate. Love that idea of running numbers for worst case scenario.

[Kevin Clayton]

Quote from @Robert Reynolds:

I recently just pulled money out of my house using the HELOC to build an ADU in Los Angeles. I prefer the HELOC for short term needs, like building ADUs, and I like that you can just keep paying it back and reusing it as you want. With the refi you will be paying it back for the next 30 years, unless you pay extra towards the principal. I recommend talking to an investment friendly loan broker, I have some recommendations if you'd like.

My only regret in building the ADU, is I hired a bad contractor who has taken a whole year to finish my ADU. Please vet your contractor, and if you have a good one please send him my way! I could have used that $150k to put 20% down on a $750k investment property that would have appreciated a ton, brought me cashflow and loan buy down this past year. That's one thing to consider when thinking of building an ADU vs buying an investment property.

Great points. I love the idea of using a HELOC. Would like to hear the good, bad and ugly about the he ADU. I do have a great contractor just walked through and ADU he’s finishing in West Hollywood. Great work and he connected me with a great architect. 

yes I thought it would make sense to use a portion the HELOC as a down for a loan to build the ADU instead of using the entire HELOC to build it. Remaining money could be used as down for an investment property. Would love the investment loan broker info.

[Kevin Clayton]

Quote from @Alex Hunt:

This is a good debate here, but have to consider other financing options as well. Consider a bridge option as well, it will allow you pay interest only and have the funds set in a construction reserve and to be released on a scope of work/ draw schedule of your choosing. Also not paying interest on any unused amounts. On a 6-24 month term which can be done under the business. Touching on the comment regarding the loan being higher if you decided to cashout, depending on where you get the loan it can be as little as 0.25% higher 

Thank you Alex. I have very little knowledge in this area. Would love to learn more.  I like all the construction friendly nuances and the fact it can be done under a business.   I have heard some people say releasing funds based on scope of work was not always as fluid as they’d like. I like what I’m hearing. 

[Alex Hunt]

That is a good note to make, each lender has a different timeline/ process to their funds being released and something you want to check on with the lender you choose. It could be done under a business or a personal name varying on some states. I have plenty of knowledge to share, I also have building experience. Would love to connect to answer and questions on this or anything in the future.