Cash-out Refinance VS. Heloc

[Ricardo R.]

Hi everyone I had question or rather a strategy/scenario that I was hoping you all would be able to help me evaluate. 

Here's the scenario:     

Lets say.........

1.  I own a rental property free and clear and it appraises at 240K --- When there was  a loan on it for 120K, it still cash-flowed awesomely @ 420/mo.  but obviously  more now since there is no longer a mortgage.
2.  I have liquid investment cash reserves of 40K.

I would like to purchase 4 homes... of say 150K each and need to put a 20% down payment on each.. so a 30K down payment on each for a total of 120K total in down payments for all 4... closing costs are covered and will be coming from somewhere else. The cash-flow for each property would be @ $400/mo.

A) Would it be better to Cash-out refinance the 240K property and take out 120K for the down             payments? (essentially returning that property to a decent cash-flow of $420/mo)

OR...........

B) Would it be better to take out a HELOC on the same property for the same amount (120K) at 3.99% with $75 annual fee, which I would use for the down payments?

-My worry is that if I take out a HELOC it would cut my cash-flow for each home in roughly half and I be would stuck with that 1/2 cash-flow for up to 10 years with a HELOC which would equate to about $9,600/year in cash-flow for all four. Would it take me roughly a little over 4 years to pay off one HELOC down payment?

- If I were to Cash-out Refi., then they would cash-flow immediately at $400/mo. for a total of $19,200/year for all 4 properties combined. I would take 2 years to save for another down payment on a 5th home.

Any input would be appreciated. What are you thoughts? Is my math and vision here correct, in assuming cash-out refi might be the way to go? Open to all input guys. 

Alex

[Chris Mason]

Cash out refinance if you are certainly going to make a move in the near future. You don't want to pull $120k out, put that $120k in a checking account earning you 0.2%, start paying interest at >4% immediately, and for however long it takes for you to make your next move. If you're ready to move relatively quickly, cash out refinance.

HELOC is for if you may or may not make a move in the near future. It's an ARM that could blow up on you in the future, but you can leave the balance at $0.00 if you wish and not pay interest on money you aren't yet using. If you're going to sit and wait however long for the perfect property, HELOC.

In the HELOC case, you're eventually going to refinance that debt into 30 year fixed financing one way or another. But if it takes you two years to make a move, that two years of not paying interest will likely be greater than the closing costs on the refinance, making it a win.