I'd like some feedback on a non-typical cash reserves idea using HELOC on investment property.
Goal: maintain $40,000 in cash reserves
Option 1: Deposit into bank money market for ~ 2.3%
Option 2: Purchase $120,000 SFR. 25% ($30,000) down payment, PLUS the $40,000 "cash reserve" funds. SFR has 7.5% cap rate. Since total equity invested is 58% (70/120), it is certain to cash flow well. Remaining $50,000 is borrowed from 30yr first lien HELOC, with a 75% LTV maximum credit line. So the $40,000 could be quickly accessed if needed (the Primary goal) from the HELOC. Advantage of Opt 2 is that the $40,000 is invested in a property with 7.5% cap rate instead of 2.3% money market.
The disadvantage I see is that the borrowed principal on HELOC is costing 6.25% instead of the 5.0% I'd likely get with fix rate 30yr term mortgage AND HELOC is adjustable rate tied to LIBOR + a margin. The interest rate arbitrage between cap rate 7.5% and borrowed funds 6.25% is thinner than I'd normally find acceptable (normally 2.5 spread minimum) , but the main goal on this one is access to cash reserve.
I'm leaning toward Opt 2. Thoughts welcomed.
I would lean toward Option 2 mainly bc the Fed is projected to cut interest rates 3 times this year (& possibly more in 2020) so lower all those rates you mentioned.
Option 1 will most likely earn you way less than 2.3% by end of 2020. And the cost of HELOC should be way less in the near future as well so you may get that 2.5% spread anyway. Borrowing costs should be getting cheaper & cheaper.
That said, I wouldn’t necessarily invest ALL of your cash reserves down to the point where you have $0 in your bank acct. Couldn’t tell if you have any cushion beyond that $40k!