Refinancing dilemma .. Payoff HELOC or Use it to buy another one?

Question

Dear folks

We have 3 Properties that we acquired using our HELOC As the down payment few years ago.

One of the mortgages is coming up for renewal and considering the property value went up about 70% in 3years I am planning to refinance it and pull some money out. (Instead enjoying the LTV status)

So the question becomes ..... should I use the money to invest in another property or pay the HELOC?

I am currently inclined to buy another one as the HELOC interest is 100% tax deductible hence I may keep it as a “never ending” nor growing debt.

Thoughts ?

Thanks in advance

Edison

Tyson Cross · Answer

I would use it to buy another income property. but I wouldn't buy a single family home. I'd take a big enough chunk to buy as many doors/pads as I could - the return on the money is going to most likely be substantially higher than the interest rate on the debt. Additionally I invest purely for cashflow. Appreciation is gravy and you will get that with improved operations and increasing the income. But let's say you bring in an extra 4k a month in cash flow - it's definitely worth the 1k payment is not?? Just hypothetical numbers, but if it supports the payment with income producing property and gives you cash flow, it's a no brainer. Take advantage of it. Only thing you want to ensure is the terms of the debt and interest rate fluctuation. Other than that, I think a HELOC strategy is a great one.

Edison Reis · Answer

Thanks @Ashish Acharya !

That’s my thought process despite the fact having a large HELOC (in the negative) can be a bit overwhelming

Cheers

Edison

Ashish Acharya · Answer

@Edison Reis,

It boils down to if you will earn greater return on investing outside or paying off heloc.

As you mentioned, heloc interest rates are actually less than your agreement because of the interest deductions. Factor that in too.

Canaan Evans · Answer

I didn't realize HELOC interest is tax deductible! You learn something new every day :)

I think this really depends on your timeline and goals! If you're planning on getting another property ASAP and think you could get a deal in a reasonable amount of time, I'd just use the cash. If you think it might take awhile, I'd just get that HELOC paid off and utilize it when you're ready. It's as good as cash, but there's no reason to pay interest when you don't have to!

Refinancing dilemma .. Payoff HELOC or Use it to buy another one?

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