Cash reserves vs HELOC

2 Replies

Say for example you have $100k in cash reserves, and also have $200k equity in your personal home. You want to buy a few homes for buy & hold rentals. Is it better to first take out a HELOC, before using your cash reserves for down payments on multiple homes? Should you use the HELOC money for the down payments instead of the cash reserves? Will the extra HELOC debt be an issue for getting conventional financing? Can it be used since it's borrowed money? If you use your cash reserves 1st, will that be an issue to later buy more properties using the HELOC money since you've spent your cash reserves and getting into more debt using the HELOC for down payments? Help!

@Alex Corral lots of good questions here and I'll try to address them one at a time below. I would strongly suggest that you be prequalified first with your lender. That way, you can discuss these types of scenarios with them specifically. I'll speak in concepts below but knowing your exact DTI, payments, etc. would be tough in this type of a scenario. While I may not state what specific action you will need to do I hope to just give you some good information to consider.

1. Is it better to use a HELOC before using cash reserves? - With each property you purchase you will actually be required to have a certain amount of cash reserves.  The more properties you have the more cash reserves you need.  Once you spend your cash, it's kind of hard to get it back.  I would certainly find out how much cash reserves you are required to have BEFORE making a decision on which one to use.

2.  Will the HELOC debt be an issue? - Yes, it certainly could be an issue. If you are using the HELOC for the down payment, your lender will have to hold the payment against you. Hopefully you are only buying properties that cash flow so hopefully the impact won't be too large. Your lender should be using the income from the property you are buying to qualify you also. So the rental income should help offset the debts (mortgage and HELOC).

3. Can a HELOC be used since it is borrowed money? - Yes, since the money is borrowed against a property it can be used in conventional financing.

4.  Another HELOC item to consider - Having a HELOC is a great benefit. But they aren't designed for long term financing. HELOCs carry variable rates, so it's hard to be able to forecast what your payment will be in the future. AND after 10 years they mature into something else entirely. Keep these features in mind as you make your decision.

Let me know if there is any other information I can help with.  Thanks!

@Andrew Postell

Thank you for your reply!

This is exactly what I'm trying to find out. I don't want to make a mistake, I can't back out of. I will talk to a Lender on the potential properties this week, as well as a few CU. Maybe probe about a 2nd mortgage.

I would like to use both some cash & some HELOC/2nd mtg money to buy the properties. I think if I can use a combo of both, I can leverage to buy an extra 3 properties than just with my cash reserves. I just bought my 1st investment in Phoenix, so I do know my FICOS were above 800 & DTI was around 20%. Good numbers but I like to be cautious. And depending on if I go 15y or 30, that will change too. Will the cash flow be counted at 100%?

As far as the HELOC terms, good point. I think I'd try to use the cash flow to try & pay off the HELOC note asap. Would looking into a 2nd be better? The issue there is I'm not sure how much I'd want to borrow.

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