Increase HELOC or Cash?

27 Replies

I have an opportunity to pay off my mortgage by the end of the calendar  year.  At the same time I have been waiting for this opportunity to make my first real estate investment. I figure these are my two choices:

1. pay off my own mortgage and increase my current heloc to make my first REI

2. Pay off 90% of my current mortgage leaving 10% of available cash for REI

3. Unless there are other options im not aware of

 I shouldnt be laughing but is this a first world problem?

My opinions are controversial, and alot of people think I'm wrong with that said you should sell your house now is the time to get out of Illinois with all the tax increases and employment leaving the window of opportunity is narrowing. When you sell your house and your money is liquid move to a state where taxes are low and invest in fix and flipping, now is the time to flip with the uptick in real estate pricing. Use debt to make money and stash your money to the side, once this bubble pops (I give it 5 years) then take all this stashed money and obtain buy and holds, once the market improves sell the inventory and then repeat to you die you will be a rich man.

Try to maximize both. They will both be useful!

Talk to your lender about what home purchase you are looking to make in the future. They can advise on how to structure your debt and equities to maximize loan potential.

I personally wouldn't pay the current house off and take the maximum of both options. Your mortgage is a SMALL price to pay for liquidity.

HELOC!!! Who doesn't like cash when they need it?

That being said, I'm not against @Ian Voakes 's idea of a line of credit on a business because you turned it into an LLC. I like the layer of protection you get from an LLC. @Mike Olszewski maybe you could do both the HELOC and a line of credit on an LLC...? experts....? Can you tell I'm a fan of being able to get cash when you want it?

@Kristina Heimstaedt I could see your point about HELOC to get cash fast, I just saw a client pull a heloc out to buy bitcoin, and another to buy furniture (crazy). For a seasoned real estate pro its not a bad idea to us heloc for short term cash flow to keep a project afloat, but for someone who is a part time investor or just getting into the game it could be a nightmare. I think rich dad poor dad brain washed me here's a quote:

 ''Traditionally, when housing prices rise, so do home equity loans. People use their house as an ATM, assuming it is an asset that will always rise in value. And they quickly forget that’s not true."says Robert Kyioski

They also say "it will never go down" 

The reality is if the investment they used equity on goes bust, they lose their job and/or there is a major correction on home values then the investor could face foreclosure, and/ or a huge financial loss. 

History repeats itself, and I have seen many people get their heads cut off during the last recession using this same scenario as the poster

@Ian Voakes you're right in that maybe I'm an optimist to assume that people will do smart things with their money. I have that conversation every day with clients when making purchases. 

I completely agree that purchasing a boat using your HELOC is about as bad as a sub prime mortgage if not worse. My theory is more that if you can use your HELOC which has a hypothetical interest rate of 5% to purchase an income property that produces an ROI of 7%, how pissed would you be if you didn't have a HELOC nor the cash to make things work? I would never advise someone to use that same HELOC to make a purchase with an ROI of 4% because as far as I'm concerned, that puts you in the red.

However, I think it is a complete failure that more people aren't well educated or don't seek education related to finances. I understand that it is difficult to navigate when things change constantly. Let's face it though, we're here to make money and achieve financial independence. Being educated in how to leverage properly is typically part of that equation. I had the conversation today that my job as an agent is more about providing my clients with knowledge and an education for them to make the right decision for themselves. For most people who don't come from a lot of money, to me, it's important that people know what tools are at their disposal to achieve their goals whatever those might be. I think people should not only educate themselves, but I hope that they will also be wise and not repeat history. But it's not my money.

@Ian Voakes If people buy furniture with a HELOC the problem is with the person, not the instrument. If Mike is able to save a substantial sum of cash he doesn't sound like someone who would be tempted to use the HELOC for consumer purchases or speculative investments. He sounds like someone who would use it to make sound investments. In that case, it makes much more sense to pay off the mortgage because it will save money on interest until is a drawn back out of the HELOC.

@Mike Olszewski the new tax plan is about to be signed into law. It will greatly increase the standard deduction, making it very unlikely you will be itemizing and taking any deduction for your home mortgage interest. If the HELOC is only used for purchasing rental properties, you should be able to claim that interest as a deduction against your rental property. There was also some debate early on in the tax bill about whether a HELOC would be restricted as far as what you could use the money for and still claim deductions. I am not sure if any of that made it into the final bill.

Talk to an accountant familiar with the tax bill to chart the best path.

Originally posted by @Kristina Heimstaedt :

HELOC!!! Who doesn't like cash when they need it?

That being said, I'm not against @Ian Voakes 's idea of a line of credit on a business because you turned it into an LLC. I like the layer of protection you get from an LLC. @Mike Olszewski maybe you could do both the HELOC and a line of credit on an LLC...? experts....? Can you tell I'm a fan of being able to get cash when you want it?

Do you think someone starting out in real estate could start an LLC and get a large enough unsecured line of credit to buy rental properties? Although theoretically great, is it really likely a bank will agree to this?

@Mike Olszewski

#3 - other options. I have a totally different approach for you to consider - refi your house, pull out 75%, and use that for your next REI purchase(s). This may be counter-intuitive to how most of us were raised (pay off your mortgage as soon as possible) but it actually makes sense. Think about this:

- Interest rates are still low, you can probably find a refi around 3.75%

- leaving 25% in equity will avoid mortgage insurance

- 3.75% on an owner-occupied primary home mortgage is less interest than you will pay for a HELOC

- you'll now have a bunch of cash available for multiple REI's, for rehabs, etc

- leaving equity in your house is not earning you money - at the minimum, you could even park it in mutual funds and make 7-8%. Less 3.75-4% on the loan earns you 3-4%. REI can net you even more.

Just another approach to consider. 

@Tandi H. This is kind of what I was saying, use debt to make money. Putting money in a hole in the ground isn't a good investment.

@Joe Splitrock If he sells his house and turns it liquid he could put it into a LLC Checking account and use that for collateral on a Business line of credit. Real Estate is always a risk but this would minimize his risk.

@Larry T. I'm not sure of his character and I'm sure he is of good character, my point is no matter what you take a heloc loan out there will be corrections in the market, one correction and the heloc will be taken away in a heartbeat. Instead of using personal houses as a atm, start a business and do it for the long term just like all other businesses do it. Its up to the investor and these days I sound crazy I get it, 9 years ago I was a genius with this viewpoint nowadays I'm a moron in the future when it tanks I'll be a genius and then the market will improve again and then I'll be a moron again LOL.

@Tandi H.

That's actually my plan of action. Once I pay off mortgage (hopefully by first week of January) I will ask current bank to increase my current heloc to not only get a larger available amount but a better rate as well.

Cash is KING, don't ever use it. 

How do you think you will pay off your HELOC when the number goes from 4.50 to 8 in the next 2 years?

All the HELOC's increased by 25 basis points 4 days ago, and the market is predicting another 4 increases by the end of 2018.

@Mike Olszewski

I don't think you understand - a HELOC is not your equity, a HELOC is a loan against your property. What I'm saying is to refi a fixed 30 year loan on the property, and put that cash in your pocket. I think @Brenda Wright is saying the same thing - a HELOC is not a fixed rate and is not predictable like a refi.

Originally posted by @Tandi H. :

@Mike Olszewski

I don't think you understand - a HELOC is not your equity, a HELOC is a loan against your property. What I'm saying is to refi a fixed 30 year loan on the property, and put that cash in your pocket. I think @Brenda Wright is saying the same thing - a HELOC is not a fixed rate and is not predictable like a refi.

 I agree.

Originally posted by @Ian Voakes :

This thread has gone around in a circle, people are going to do what they are going to do.

Im not leaving Chicago. Im one of those Chicago Public School teachers that everyone in Illinois loves to hate, plus my family and kids are here so I wont be going anywhere anytime soon. 

All I want to do is make some sound real estate investments to supplement my income when i retire (early at that). I would also like to teach my kids that same sound financial advice in real time. Basically to avoid everything that my parents made me learn the hard way. 

@Mike Olszewski 

Leaving the state is just personal preference.

Helocs from what I have seen was one of the top causes of the housing crisis in 2007.

The road I went down ten years ago, getting my head cut off, is what I'm trying  to prevent you from experience the same hardships I went through.

What I have been sayin on this thread isn't an awnser people like to hear but it's the truth that's all.

Whatever you decide to do its your money and your properties, nothing but good fortune and good times is all I wish you, merry Christmas.

@Mike Olszewski First, I'm super glad that you're weighing your options. 

To add to @Tandi H. point, the immobile equity sitting in your house is of course not doing anything for you expect that the bank now has all that equity and they are investing it in all kinds of assets. 

Tactically, you can start scanning your local market for someone to partner with, someone who you can leverage their track record to scale your REI activities. In the interim, start the shopping around for a good REFi product with a great interest rate amortized over 30 years.

Another thing I'd like to touch on is folks continue to talk about a market correction sometime in the future. The truth is no one know when this "correction" is happening. Therefore, RE Investors should continue to invest conservatively as opposed to sitting on the sidelines being scared of a proverbial correction. 

Hope this helps Mike. Good luck. Thanks! - Ola