Cash or HELOC - what is better?

Question

We have a few rentals, but have been out of the real estate game for a few years. I am closing on my new house in TN in August and have a question. Is it better to have cash in hand (therefore financing that at 3.875% for 30 years)? Or to have a HELOC (financing at prime plus 0.25% only when you need it).

My goal is to BRRRR properties with cash and then finance them at the end for long term rentals.

William Miller · Answer

I am thinking HELOC primarily for the lower interest rate saving $1200 (depending on fees) and have the ability to buy quickly.   What should we be asking during the process?

Alvin Uy · Answer

My wife and I are on a similar situation.  We have several investment properties that have accumulated large equity.  We wanted to see if we can leverage it.    We working on a project right now to convert a small SFR on a large R2 lot into a 2unit (2 separate houses)... and trying not to use any of our own cash.   Instead, the property we just bought was acquired using a loan (with no prepayment penalty).    We will be using the HELOCs against 2 of our rentals to rehab/build 2 new houses on the lot.   All loans and lines of credit will be paid back after the property is sold.

William Miller · Answer

I am trying to figure this out as well.  Not to Highjack but I also need input.  What if you Buy a home for 70k 5.2% interest  and HELOC for loan amount. But you are able to pay it off in 12 months with a 2.75% interest rate.  Goal being to have liquid cash to BRRRR.  @Conrad Johnson I am just north of you in Hopkinsville, KY.

Brit F. · Answer

@Conrad Johnson, the answer depends on you and your business model.  Personally, I like using cash to acquire long-term (buy & hold/BRRRR), and use HELOC to acquire short-term flips or short-term arbitrage opportunities.

Conversely, you can certainly use a HELOC for buy & hold property, but there are some gotchas (assuming conforming loans for your refi):

• Cash-Out Refi before 6mo'sIf you refi before 6 mo's, you can only cash-out up to your original purchase price, which parks a fair bit of equity in the property, such as all your rehab costs.With a HELOC, you might end up with an open balance after the refi, such as if you sourced both purchase & rehab from your HELOC.With cash, you'll walk away with less cash than you invested but will have no open balances to pay.A hybrid approach might be to use HELOC for purchase and cash for rehab.
• If you refi before 6 mo's, you can only cash-out up to your original purchase price, which parks a fair bit of equity in the property, such as all your rehab costs.
• With a HELOC, you might end up with an open balance after the refi, such as if you sourced both purchase & rehab from your HELOC.
• With cash, you'll walk away with less cash than you invested but will have no open balances to pay.
• A hybrid approach might be to use HELOC for purchase and cash for rehab.
• Cash-Out Refi after waiting 6 mo's, aka a 'seasoned refi'Presuming your BRRRR numbers work out as intended, you should be able to recover your investment and still have equity required by the refi lender.With a HELOC, you'll carry at least 6 mo's of interest, but you shouldn't have an open balance after the refi.With cash, you'll get back your investment and won't have the carrying costs you had w/the HELOC.  Downside is your cash is tied up for 6 mo's.
• Presuming your BRRRR numbers work out as intended, you should be able to recover your investment and still have equity required by the refi lender.
• With a HELOC, you'll carry at least 6 mo's of interest, but you shouldn't have an open balance after the refi.
• With cash, you'll get back your investment and won't have the carrying costs you had w/the HELOC.  Downside is your cash is tied up for 6 mo's.

• If you refi before 6 mo's, you can only cash-out up to your original purchase price, which parks a fair bit of equity in the property, such as all your rehab costs.
• With a HELOC, you might end up with an open balance after the refi, such as if you sourced both purchase & rehab from your HELOC.
• With cash, you'll walk away with less cash than you invested but will have no open balances to pay.
• A hybrid approach might be to use HELOC for purchase and cash for rehab.

• Presuming your BRRRR numbers work out as intended, you should be able to recover your investment and still have equity required by the refi lender.
• With a HELOC, you'll carry at least 6 mo's of interest, but you shouldn't have an open balance after the refi.
• With cash, you'll get back your investment and won't have the carrying costs you had w/the HELOC.  Downside is your cash is tied up for 6 mo's.

It's a good rule of thumb to treat a HELOC like a credit card that you pay off as fast as possible.  Avoid acquiring properties without paying off the HELOC because the balance perpetually grows until the draw period ends, and you'll experience unpleasant payment shock.

Consult your CPA for tax implications: HELOC interest likely wouldn't be deductible in your situation based on your stated usage, whereas interest on your financed primary residence should be deductible.

The good news is that there's not really a right or wrong answer. Just depends on your risk tolerance and personal preferences.

Costin I. · Answer

@Conrad Johnson Line of credit, not a loan. Reusable, interest calculated on the daily balance (not amortized and not paying anything if you don't have a balance).