Cash out refinance or HELOC?

Question

It feels like I should have more cash reserve in case of losing my job or having an opportunity to buy another rental property. However, the home prices have increased even higher due to the lower interest rate. It is hard to find any good deals on the market. So if I do cash out refinance on my rental property, the cash might not get used to buy. But if I lose my job, the cash will help. Furthermore, refinancing has closing cost and it will increase the mortgage and lower the cash flow on the rental property.  Shall I just open HELOC on my primary house in case I need cash? Is HELOC more risky than cash out refinance since you use your home as collateral? Thank you.

Donna Xu · Answer

Thank you Jody for your reply. I do have some worries and concerns. I worry about the economy situation and potential layoffs. It will only get worse when we go into the second half of year. My goal of doing real estate investing is to get passive income. I just want to buy and rent it out and hold. But in my local market, the house price is getting really high and hard to find good deals. I guess if I get laid off, then no buying rent properties. If my job turns out to be stable, then I want to look for opportunities to buy.

Percy Matsunaga · Answer

@ Donna

I think the Heloc depends on the bank. My bank allows me to have an open line of credit on my Heloc and I can borrow and repay for 10 years.
May the end of 10 years I can reapply for the same loan or extend into an actual loan and principal pay down.

Cash out is good too, if you know you want that fixed amount to pay back monthly.

Jody Sperling · Answer

I want to highlight the fear behind your question. Nothing bad has happened to you yet, unless you neglected to mention you were released from your job or a major repair fell in your lap. Given that you are "waiting for the other shoe to drop" I would encourage you to refrain from a Cash Out Refi.

Opening a HELOC, on the other hand, can't hurt, because you don't have to use it, and once you open it it's available for a period of time should another investment opportunity arise. HELOCs are only dangerous if you are irresponsible with debt. Having one can help you sleep better at night since you have emergency money available, but their best use may be in finding a great deal to flip.

Affirm to yourself why you began in real estate investing, combat the fear, and search for the next great deal, with a focus on building cash reserves for the future.

Michael Ablan · Answer

@Donna Xu  - Lines of credits are risky because they can be revoked at anytime.  They're also adjustable rates and typically higher than normal refinances.

I always opt for the cash-out refinance.  At least I know its mine once it hits my bank account

Donna Xu · Answer

Thank you Percy. I don't quite understand HELOC yet. If I just want to buy rental properties and have the passive income, will HELOC be the best way to go?  Cash out is less risky. But I don't have a target to buy yet and do I want to increase my monthly payment during this time?

Percy Matsunaga · Answer

@Donna Xu

Just think of Heloc like a line of credit backed by the property which you get it from.

If HOME “A” has a value of $100K and you only owe $20K, the bank might lender you another $50K in a line of credit. You can use up to $50 K of that line.

Or, same HOME “A” has a value of $100K and you do a cask out for $50K, then the following month your monthly mortgage will go up to $ X amount.

Hope this help better explain both.

Donna Xu · Answer

Thank you, Michael. Cash out refinance is less risky. I will do it if it does not increase my monthly payment.

Cash out refinance or HELOC?

Most Popular Reply