Would you go with a HELOC or mortgage?

Question

I have one rental property with no mortgage.  I want to have funds available for my next deal so I went to try to get a HELOC on the rental.  One bank, a credit union with which I had an account for many years, offered a type of HELOC at 6%.  Another bank that I have a checking account with doesn't offer HELOCs on rental properties, but offered a mortgage at 5.25%.  Each will waive closing fees because of my other accounts at those banks.

I can see that with the HELOC I would only take out the money I needed and save interest that way, but with the mortgage I suppose I can reinvest the money not being used on new house deals somewhere else at a higher return than 5.25.

Any other opinions on what is the best way to do this?

Michael Delpier · Answer

@Mar Now it depends on what you want to do. If you want to flip to build up a pile of cash for buy/hold rentals, I would get a revolving credit line on my rental. You can then buy a house in a condition that would not normally pass a banks inspection criteria, rehab it, refi it and pay off your credit line. Rinse and repeat .

If you want only buy/holds without needing any rehab, I would do a cash out refi and buy several other properties using 30y mortgages. Let the rent build equity on one of the houses and then rinse and repeat. Slower, but less work.

There are several other strategies depending on your end goal, skills, and risk tolerance.

Thomas S. · Answer

I would opt for the maximum amount you can pull on a 30 year mortgage. Your money now is not serving much value and would be best distributed among several properties in the form of minimum DPs.

Taking a HELOC and paying it back to reuse again is a much slower process that has no advantage. Your money is dead at this point so the faster you can get as much working for you as possible the better. Minimum DP on multiple properties is far better than one property.