HELOC vs Mortgage first time buyer

11 Replies

Hello everyone. I'm 4 years from being able to retire from the military and dont want to work in gov contracting the rest of my life. I used the VA loan for my first home in San Diego and have 200k in equity that I would like to use that to get my feet wet in a rental property.

Going forward, should I use a HELOC or traditional financing method for my first rental property? I want to be as prepared as possible so every angle pros and cons would be greatly appreciated.

@Phillip Moreno

Hey Phillip,

Full transparency I'm an Agent in SD who helps people use the VA loan to invest. Sounds like you got the head start so congrats!

With how rates are right now, I'd suggest looking into a cash out refinance. Lower your monthly on your VA property and pull out a decent amount of equity. You could potentially just move out of VA financing and reuse the VA loan for a multi family on top of the equity you pull out. But if you're working with a family I could see this not being as attractive as an option.

I like HELOCs and think they can serve you pretty well. I just prefer the refinancing route when it comes to the VA loan. I'm glad you're using it for investing and hope you enjoy the investing journey!

All the best,

Donald Appleberry

As a military member, if you occupy the house for 2 years out of 10 years, your capital gains can be excluded.  So you may have a tax benefit to holding longer, as long as this was your primary residence for any 2 out of 10 years. 

HELOC interest can be deductible if you use the money to buy income property. Or the IRRRL program to refinance that VA into a lower rate and pull cash out, might also make sense.

Here is my expensive guru course for military members...

When I got out, my goal was to buy 5 houses and use the debt snowball to pay them off rapidly.  I did 10 years and obviously didn't get a pension, so my thought was to make my own pension. 

We bought our first house in England and fixed it up and sold it for a good profit in pounds and made more on the currency exchange.  Bought a pretty house in Arizona.  Rented it out when we bought another fixer to live in.  Got aggressive in finding fixers to rent out.  Got orders back to England...10 years later, sold our house in England and had about the same amount of money as your equity.

Decided to buy 4 houses at $50k down, give or take, with a value of $200k each, near Air Force bases in growing cities.  We chose Texas and Florida, as they both are in the South (we didn't want water pipes to freeze) and we chose brick or block houses so we didn't have to mess with painting or siding as often.  We chose near bases, because we could work out how much housing allowance E-5s to E-6s, the broadest tier on a base, would make and allow us to make a few hundred dollars cash flow. 

We bought house 32 and 33 last year, and are still going...slow and steady. Hubby got out of the military 2 years ago, so we have his pension.  We always have had a fixer going, and we are still doing that, too.

This is my opinion on HELOC vs refi. We use HELOC if the money need is expected to be short in duration. Such as for a purchase that is expected to be refinanced in the first year such as a BRRRR or auction purchase. We use refi for unknown or long duration loans. This is because I do not like variable rates (HELOC) for long term. This has always been the case for me, but especially when rates are near all time lows I do not want a variable rate that can have its rate double.

Fixed rate are easy to model and allow me to sleep like a baby. 

HELOC work great for quick cash at a low cost.

Good luck

@Kerry, the exemption actually extends up to 15 years for being able to avoid paying capital gains taxes, which is such an incredible benefit!

@Phillip, Either option could work great for you. The question is, what are your goals? I think that will help frame which idea could help you achieve your goal(s) better.

@David Pere My goal is to have a few long term rental properties under my belt by the time Im eligible for retirement (4-6yrs). Then when I retire from the service, be able to expand and do this as my second career. 

Depending on cash flow it may make sense to offload, take the cash and invest in rentals elsewhere, but if that property cash flows I would say keep it and buy other solid rentals.

I might recommend leaving the equity in it and saving to invest in your next, but HELOC is a good way to pull equity if you would prefer to tap the equity to scale faster.

Congratulations @Phillip Moreno on nearing retirement and kudos to you for getting the plan in place 4 years in advance. Like @Dan Heuschele , I would use the HELOC as a short-term solution to get into something that won't finance traditionally, fix it up, and then secure long-term financing at a lower rate. This is a good general rule, but there's additional details needed to assess your specific situation (is the San Diego property still your primary residence, will you rent out that property, what type of rental are you looking for, what are your current loan terms, how much cash do you have, etc). A HELOC on a primary residence will have better terms than a HELOC on an investment property.

Also, to clarify some of the previous comments, according to the VA website, the borrower is not allowed to extract cash from their equity using an IRRRL.

Good luck on your first rental!