100k for home renovation: Cash or Heloc while cash earns interest
I'm trying to understand whether it's strategically wiser to use cash or a home equity loan to pay for that renovation. Hoping someone can check my thinking:
For the sake of keeping this example simple - $1M multi family building that after putting in 100k of renovation will benefit in an additional $1000 in rent increase per month. The cash on cash annual return is ($1000 x 12)/$100,000 = 12%
$1M loan @ 20% down @ 5.125% = $4355/month
$100k home equity loan @ 6% @ 20 years = $716/month for 20 years
- 1. Combining the two into a single number I can compare gets me to a blended interest rate of 5.222% at $1.1M, is that correct?
- 2. Separately, if $100k is earning 3.25% in a savings account (yes, I know that's high currently), is my effective rate of that loan actually (6% - 3.25% = 2.75%?)
- 3. If I'm still gaining $284 ($1000-716) a month from the increase in rent, and getting $275/month from interest on the 100k that's still in the bank, my annual cash on cash return (($284+$275)*12)/$100,000 = 6.78% while still having 100k to access, correct?
- 4. My gut tells me keeping cash on hand feels like the better option, but really wanting to remove "feeling" from this - something in my math "feels" off
- 5. Or should I be looking at the CoC return for the entire monthly payment vs. total rent, not just the incremental return of the 100k?
I will assume the HELOC is on your personal residence and for that reason, I would not use it on the multi-family. I would use cash, but not all at once. $100K in renovations can be done incrementally over time. I woud focus on one or two vacant units at a time. Once renovated with cash, increase the rents on those newly renovated units. Continue this until every unit is renovated and leased at current market rents. This increases the value of your property and you can then refinance it to replace the cash that you used.
@Anthony Dooley
What if one of the units is being lived in? ie house hacking - In that case, why not a HELOC?
Quote from @Abby S.:
@Anthony Dooley
What if one of the units is being lived in? ie house hacking - In that case, why not a HELOC?
A HELOC is a common option, but using cash keeps the debt low and cash flow high. HELOCs are interest only and the interest rate can be increased for any reason the lender sees fit.
Conversely, what about just using the home equity line of credit? - if there's enough equity built up that's worth utilizing
Hi Abby,
You might also consider unsecured funding in the form of working capital loan. it's out there and available from lenders whose criteria is not as strict as conventional banks.
Be happy to connect.
Best,
Dave