Cash out dilemma: 100% equity, get a HELOC or a mortgage?

8 Replies

I have a multifamily property that I have made a lot of improvements to since it was purchased 1 year ago. I own it with a family member in an LLC. This person insists on getting a HELOC and their reason for it is because we will only pay for the money when we need it, but the rate increases with the prime rate. They also tried to tell me that if you buy a property cash, that you cannot take a mortgage. I think that getting a mortgage makes better sense because being full time investors, we will always need money. In addition, we can lock a rate while they are still low for a very long time.

My question: HELOC or mortgage?

I would go for the mortgage.  I'm not sure what you mean that you can't take a mortgage if you buy a property cash.  That's basically all I do.  I buy with cash then go to a portfolio lender and put it under a commercial loan.  The couple I have done recently were 20 year loans at 6%.  Rates are going up but I think it depends on what your strategy is and your family member's long term strategy.  If they differ to much one person could buy out the other or you could sell, split profits and each move on to pursue your own strategies.

I would agree with a long term mortgage. If for some reason you end up looking at HELOC, at my local Credit Union they have a HELOC that is about 4% right now that moves with Prime, but can be looked at any time with up to a 10 year rate lock.


Liz - is the property  an investment property or is it a primary residence

Do you need any funds from this equity now ….if not - I wopuld recommend the HELOC ...if property is an investment property and if you want to ge the heloc in the LLCs name - you will likely find that there are not many lenders that will be willing / able to help with this request

I was not aware that you could get a HELOC on an investment property. I guess it never hurts to ask! Wouldn't using a HELOC leverage your equity vs getting a mortgage that leverages debt? I'm reading Robert Kiyosaki's book "Retire Young and Retire Rich" and he strongly encourages to leverage debt and not leverage equity. I would like to get your thoughts on this. 

For me.. it would depend on what your plans are for the money and what your time frame is.. All the negatives already written about HELOCs are correct. Here is the positive that I like.. you can put money in and take money out at will. That isn't true (at least the 2nd part) with a mortgage. 

Summarizing.. I would say that the longer you plan to keep the property and "leave" the debt on it.. the more I would lean toward the mortgage.

If you get a Heloc, the bank will file a mortgage to protect their interest. If you get a term loan the bank will file a mortgage to protect their interest. It seems to make sense to get a Heloc(if you can) and use the funds as needed for other projects. When the other projects sell or become rentals, get a term loan to pay off the Heloc.