Buy with fixed mortgages or HELOCs?

Question

Hey BP folks.  I am brand new to BP and have a question to get some advice.  I currently have 2 rental houses that have fixed mortgages and was wondering what I should do with some extra cash I have saved.  My first thought was to pay off one of the houses and open a HELOC to have access to the cash should I need it (buy next house in cash using LOC and additional saved cash)).  My thought is that it takes me months to find a good deal and they are hard to come by these days.  Why not save on the interest while I wait?  Also, when it is time to deploy the cash out of the HELOC I feel like I have flexibility in controlling the monthly cash flow.  The other option would be to try and buy 2 rental houses that would be mortgaged (or a single larger property).  Any thoughts from the pros out there?

Wilson Churchill · Answer

I would buy the next property outright, then get a HELOC or mortgage on the new property.

Uwe G. · Answer

Thanks Rumen and Doug.  So you both are not turned off by the high fees of mortgages like I am?  I was thinking that being able to make all cash offers makes me a much stronger buyer with the ability to also close much more quickly which can be attractive.  I would be curious to hear thoughts from the pros on what I am missing when it comes to this type of logic.  Maybe I am just having a hard time finding deals that I deem good enough in the SFR space.

Rumen Mladenov · Answer

I agree with Doug, go with down payment and fixed mortgages if you only have two rentals. Rates are still fantastic...  Once you build a bigger portfolio it will become harder to get them and HELOCs would be your only option. I used fixed rate mortgages for my first 6 properties, after that the PITI reserves + down payment required exceeded the purchase price so it made more sense to buy cash and then take out HELOCs.

Doug McLeod · Answer

Assuming these are not your emergency funds and that you are working on building a portfolio of rentals, I`d suggest your last idea: use as down payments on  two more rentals. If deals are too slow coming, network with your local REIA and find some realtors who know how to work with investors and/or some wholesalers who can bring you potential deals.