Heloc to jump start cash flow ?

Question

Hello! I just got a heloc for 300k.. I figured I have a lot of equity in my primary why not put it to good use .. so my question is should I take some of this and pay off another one of my investment condos.. if I take out 100k (amount I still owe on investment condo)from heloc and pay it off it would only cost me $400.00 a month.. however then I would be able to enjoy the full $2500.00 rental income finally!!? Opposed to waiting 8 more years until it's actually paid off..any advice?

Thomas S. · Answer

Inexperienced investors often confuse income from a investment property with income generated by equity.

Equity does not increase cash flow it decreases cash flow.

If you own a property with equity at some point the majority of the cash flow is generated by the equity which turns the property into a liability. It cost more money to maintain than it actually generates.

Cash is value by investors at a minimum of 10%. This means that for every 100K of equity $866/month is credited to the equity. With mortgages in the 3-5% range this means it is costing investors lost income of 5-7% per month on their equity. Equity in a property is considered to be dead and buried, useless and wasted.

Also you will never realise the entire $2500.....you will always have expenses.

If you have cash invest it do not bury it in a rental property.

Mark Costa · Answer

Mike,

Did you get a fixed APR HELOC? I thought HELOC's interest vary, so your payment would vary as well over the duration of the loan, and I doubt rates are going down. You'd still have to pay down the balance on the HELOC with the rent from the income, so I am not sure how that would help your overall situation unless the APR on the HELOC is far below the mortgage APR on the investment properties.

Did you consider using the equity to purchase additional rental properties? I am not sure how your market is, but maybe the ability to make cash offers will allow you to grab more properties. You could try to refinance the additional properties with a longer term mortgage at a fixed rate to pay off the newly acquired properties. That strategy would be particularly effective if you looked for value-added properties.

Mike Joesph · Answer

hi Andrew, I'm not looking to sell anything .. just thought I could take some cash from heloc to (transfer) pay off on of my properties so I can enjoy the full rental income .. does that make sense ?