Is the HELOC a smart move with an upcoming recession ?

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Is the HELOC a smart move with an upcoming recession ?

Ben Cochran

Fort Collins, CO · Member since 2013 · 109 posts · 36 votes

Trying to find the best way to utilize the assets I have, to purchase another home. Quick rundown of my position.

I own 2 homes. One is a rental, appraised for $350k, has no mortgage and brings in $1600/month.

The second is my primary residence which my wife and I are living in and flipping/renovating.

It will be 24 months this December (capital gains). Paid $330,000 and now appraised for $580,000.

We'd like to do two things. Complete the renovation on our primary, sell it and buy our "forever" home. Not sure where to pull the funds from with a possible recession looming. Get a HELOC from the zero mortgage rental or from our primary that we plan on selling? Just looking for the best strategy. Thanks

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

I would never take money out of an asset to use for personal consumption unless I was at the point where my assets produced enough income to support me and support continued growth of the business (or continued growth of business reserves). The house you live in is primarily a place to live, so financially speaking unless you planned to sell the "forever" home later (which then makes it not a forever home), it would be a foolish move.

How much more expensive is your "forever" home than the one you live in now?

The rental that's worth $350k but only brings in $1600 per month doesn't sound like a great rental, to be honest. Unless it was in a really high growth area, I would probably sell that property, use the proceeds to 1031 into a couple of better ROI properties, then maybe if there was enough left over use some of those proceeds as gravy for the forever home.

On a side note, I'm genuinely puzzled about the "forever" home thing. Maybe I'm just getting too long in the tooth but I never remember in my age group talking about forever homes when we were in our 20s and 30s. You look like a young guy from your picture - what makes you think that your next home is your forever home? I'm not being critical, I'm really trying to understand this concept. I'm in my 50s and forever homes were for people that had reached the end of their working career in their 50's or 60s, reaping a lifetime of hard work since they didn't need to conserve those funds for that many more years to support them.

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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
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I would never take money out of an asset to use for personal consumption unless I was at the point where my assets produced enough income to support me and support continued growth of the business (or continued growth of business reserves). The house you live in is primarily a place to live, so financially speaking unless you planned to sell the "forever" home later (which then makes it not a forever home), it would be a foolish move.
How much more expensive is your "forever" home than the one you live in now?
The rental that's worth $350k but only brings in $1600 per month doesn't sound like a great rental, to be honest. Unless it was in a really high growth area, I would probably sell that property, use the proceeds to 1031 into a couple of better ROI properties, then maybe if there was enough left over use some of those proceeds as gravy for the forever home.
On a side note, I'm genuinely puzzled about the "forever" home thing. Maybe I'm just getting too long in the tooth but I never remember in my age group talking about forever homes when we were in our 20s and 30s. You look like a young guy from your picture - what makes you think that your next home is your forever home? I'm not being critical, I'm really trying to understand this concept. I'm in my 50s and forever homes were for people that had reached the end of their working career in their 50's or 60s, reaping a lifetime of hard work since they didn't need to conserve those funds for that many more years to support them.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
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If you sell your primary after two years, it will be tax free rather than subject to capital gains tax. If you are willing to continue to do that, you can accumulate a lot of tax free gains over the course of a few live-in flips.
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Joel Case
Rental Property Investor · Ocean Springs, MS · Member since 2022 · 349 posts · 301 votes
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I have to agree with JD, I don't think it's time for that forever home. I thought my next home purchase would also be my forever home until just earlier this week when I saw the light. If you buy that high ticket "forever home" now, your income will be gobbled up by that mortgage. If you instead delay that gratification and get a few more rentals under your belt, you could have your cashflow paying for the mortgage on your forever home before you know it.

Also JD pointed out that your rental isn't offering a great return, I have to agree. $350,000 property bringing in $1600 a month is not good. Time to re-evaluate.
Also, Mike is correct, if you lived in a home for two years and sold it then repeated that, they would not be subject to capital gains taxes.
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Chris Turek
Member since 2018 · 33 posts · 14 votes
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Your rent of 1600 vs the value of 350,000 does seem off. My math puts it closer to $2,500 for what I would look to get. So maybe selling that isn't crazy. That said why are you looking for funds? Why not just get a mortgage on the new house. If you are buying it to live in your rate will be better than your other options. If you need the downpayment you can possibly get a %5 down mortgage. Since you are selling the primary house to live in the new house at some point I would borrow against that if it truly is required. Rates will be better on a primary house vs investment property.
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@JD Martin I’m almost 50, thanks
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@Joel Case I'm a little confused. How is cash flowing $1600/month on a small SFH a bad investment?
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@Chris Turek $2500/month for a 1200 sq Ft home? I’ve done plenty of comps in my area and $2500 isn’t even in the ballpark. Curious what math you’re using and what I’m missing here? Thanks
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Ryan Taylor
Member since 2022 · 88 posts · 38 votes
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Quote from @Ben Cochran:

@Chris Turek $2500/month for a 1200 sq Ft home? I’ve done plenty of comps in my area and $2500 isn’t even in the ballpark. Curious what math you’re using and what I’m missing here? Thanks
Ben,
Perhaps people that responded missed that the house is mortgage free...or they didnt...however still has taxes and insurance to pay...that being said...maybe you paid 160k for the house and 1600 meets the 1% criteria...if so...bravo. This of course is speculation.
At any rate...I would leverage the free and clear prop...to the point where you could comfortably still cover the mortgage, purchase another property and still cash flow a little...maybe I'm wrong...but that's what I would do...good luck with it 🤙

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Joel Case
Rental Property Investor · Ocean Springs, MS · Member since 2022 · 349 posts · 301 votes
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Quote from @Ben Cochran:

@Joel Case I'm a little confused. How is cash flowing $1600/month on a small SFH a bad investment?

On a $350k investment I would want to see monthly rents of at least $2500+. Maybe that doesn't work in your geographic location, but if so it might be time to look at properties elsewhere. Where I live I can go out and purchase any $200k 3/2 SFH and bring in $1500-2000 in rent a month. Closer to the 1% rule, which is where I would want to be.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
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Quote from @Ben Cochran:

@JD Martin I’m almost 50, thanks

Dude, you look amazing for 50. I need some of that elixir; I look like someone put me through a blender!
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Juan V Lopez
Investor · Las Vegas, NV · Member since 2020 · 153 posts · 136 votes
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Ben, that's awesome brother. Your rental sounds like a great asset. I see some folks on here commenting on you wanting your "forever home" – I'm always in the opinion that we don't know other people's situation, so it's not our place to judge. If you and your family are ready for that forever home, then go after it.

Since your rental is mortgage-free, I would absolutely leverage that into a HELOC. Since you have 100% equity in it, you can get a HELOC for 80% of the value of the property to give you almost $300K to work with for future properties.

If it were me, I would: 1) Start the HELOC process now on the rental to see what rates you can get and 2) Complete the renovation on your primary residence and gauge the market in December 2022. If the market has leveled out and you & your wife would be happy with the proceeds, sell it. If the comps aren't where you'd like to see them in December 2022, wait 6 months to give the market time to come back up and sell then.

Also, consider raising rent on that rental you own – if your rental is in Fort Collins, you should be able to get $2K for it monthly minimum.

Wish you guys the best either way, brother.
2 Reply
Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@Ryan Taylor thanks. Yeah I’m thinking they might have missed the part where I mentioned there’s no mortgage. Also, I paid $150k for the house👍🏼
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@Joel Case there’s no mortgage on the property. I paid $150k and it’s now completely paid off and cash flowing $1600/month. Minus property taxes, maintenance etc. of course.
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
4y
@JD Martin haha thanks! The secret is no kids and a wife that isn’t interested in kids either.
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
4y
@Juan V Lopez thanks for the advice! That’s exactly what I was thinking as well.
1 Reply
Joel Case
Rental Property Investor · Ocean Springs, MS · Member since 2022 · 349 posts · 301 votes
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Quote from @Ben Cochran:

@Joel Case there’s no mortgage on the property. I paid $150k and it’s now completely paid off and cash flowing $1600/month. Minus property taxes, maintenance etc. of course.

Ok, that's much better. I would honestly expect the rents to be higher in Colorado.
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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
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I like HELOC's for short term cash that I can pay back fast like a BRRRR or flip, not for long term debt IMO
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
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@Joel Case Colorado in general is pretty high but this property is in a small farming community away from the cities. I could definitely raise rents to around $1800 but I’ve got long term renters that take care of the place very well. Maybe next time the lease is up I’ll consider raising rent.
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Matt Bishop
Rental Property Investor · Dallas, TX · Member since 2020 · 161 posts · 88 votes
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@Ben Cochran, recession? I believe we are in for prosperity.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
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HELOC is always good when you also add principal payment during the draw period. How come ? You get the best of both world. Just use HELOC for anything 'productive' that at least can be tax-deducted,and you're good.
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
4y
@Matt Bishop you’re either joking or the only optimist in regards to the country’s financial outlook.
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Ben Cochran
OP
Fort Collins, CO · Member since 2013 · 109 posts · 36 votes
4y
@Carlos Ptriawan what would be an example of something “productive” and tax deductible?
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Basit SiddiqiBusiness Member
Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
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HELOC are a good idea since they will allow you to keep the interest rate on your original mortgage(assuming you got it at a low rate).
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Chris Turek
Member since 2018 · 33 posts · 14 votes
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Quote from @Ben Cochran:

@Chris Turek $2500/month for a 1200 sq Ft home? I’ve done plenty of comps in my area and $2500 isn’t even in the ballpark. Curious what math you’re using and what I’m missing here? Thanks

@Ben Cochran I wasn’t suggesting you could get $2,500 in rent for the house you own, I don’t know your area or the house. I know only the information you gave us all. You seem to believe the value of the house is $350,000. You said it brings in $1,600. I took that to me you were getting 1,600. Maybe I misunderstood. However, the reason I , and it seems some others, don’t think that is a great investment is the return you are getting. I know you only paid $150,000 but that doesn’t matter, what matters is what its worth now. $350,000. $19,600 / $350,000 = .056 . You are making about 5.6. You could sell the house give the money to a wealth manager and they will get you 7%.
The house was a great investment because you paid $150,000 and now its worth $350,000 IF you sell. Before I got into real estate investing I was a trader on wall st and I worked for a very well know very rich trader. He wold always pushed me to remember any stock I was holding should be a stock I was excited to buy more of at the current price. If I would buy more (if I had the funds) why would I hold what I had? Sell it and buy something else you like more. In northern NJ, my local market, you can get a 2 family for $700,000 that would rent for about $5,000. BTW that’s where I got the math i mentioned before. Why hold that SF rental when you could sell it and buy a better performing property. Please don’t take this as a negative comment. I would KILL to make the kind of return you just made on that property. But remember right now that is only a paper profit, you only make that money if you sell. If the market tanks and it goes down in value you lose some or all of it. Personally, I think we are going to see lower market values in the next 12 months but that isn’t really why I am saying you should sell. You can just probably find a better incoming producing property. Good luck with it and congrats on building so much equity so quickly, I hope you can find a good way to parlay it into something even bigger.
-Chris
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
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Quote from @Ben Cochran:

@Carlos Ptriawan what would be an example of something “productive” and tax deductible?

- repairing rental or repairing primary to increase value
- buy rental
- buy bonds
- join syndication

not productive: buying car/RV/cosmetics lol
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