Getting a HELOC for a Rental Property

[ForeverLearning]

Hello All. I am new to the whole Financial Freedom world & going forward we are really trying not to make bad financial decisions. I wanted to come here to make sure we are not making a wrong decision or not looking at everything in regard to this HELOC. So here goes:

Primary Home Balance: $24,963.43 @ 3.0%  (our condo is worth $110k)
Bank HELOC: $87,000 @ 3.29% First Year, 4.02% after 1st Year-Variable APR

The representative said that part of the $87k would be used to pay off the Primary Mortgage. However, our original goal was to pay off our mortgage in 4 months & THEN get a HELOC to purchase our 1st Rental Property.

Please help us understand why we it would be good to get a HELOC NOW if the interest rate is higher than the original mortgage. Also, the first 3 months we would be paying $213/month toward interest & was told we could not pay any extra toward the principal for those first 3 months. That's really confusing because we are only paying $64/month in interest on our original mortgage.

Does this make sense to do just to get the $87k for our future rental? Of course, we know no one knows the future but it does look like interest rates could go up. So would that be the only benefit?

Also, do most people on this site prefer to just save up cash for a rental property or use a ladder investment? We are trying to read different sites on landlording to make sure we can handle this avenue of investment.

Please let us know if we are not thinking of something or not thinking of the end goal. Thank you all.

[Jalapeno]

I don't think it makes sense to pay off a lower interest locked in rate to then borrow at a higher rate. That $24k is money that you have already borrowed at a lower rate, why would you pay that off first and guarantee a lower return?

Personally, I would never take a HELOC to invest in something. If anything, I think you would be better off paying off the balance on the primary residence and then saving what would have been your mortgage payment and applying it towards real estate investing. Although with your numbers I would imagine your mortgage payment is pretty low and it might not make a difference in which case I would just pay the minimum.

[Another Reader]

In your shoes, I would not take a HELOC at this time.  You do not have a property identified and under contract.  Money sitting in the bank with payments on it and no purpose tends to get invested incorrectly, especially if you are a novice.  In addition, I would never take a higher rate HELOC and use it to pay off an underlying mortgage at a lower rate.  A HELOC should sit on top of a lower rate underlying mortgage.

I have no problem using a HELOC to buy another rental.  I have over twenty years in the rental business and almost 35 years in real estate fields.   I know what I am doing.   If you read the "No Nonsense Landlord" blog, the author uses HELOCs for acquisitions as well.  He is very experienced as well.  However, as a new investor, I would never do this.  It's too risky to put your home at risk to enter a business in which you have no experience.  To protect yourself from a beginner's mistake, your first property should be bought in cash or financed on it's own.  That way, if you make a serious mistake, you will not lose your home.

In your shoes, I would not write any checks until I was a lot more knowledgeable about real estate.  If there is a good real estate investors' association in your area, attend a few meetings and talk to some seasoned investors.  Read some of the books on the list pinned at the top of this category.  Sword Guy makes a good recommendation with this book.  https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=la_B001I9RW12_1_1?s=books&ie=UTF8&qid=1481199160&sr=1-1 

Mistakes in real estate can be very costly.  Get educated before you move forward.

[ForeverLearning]

Jalapeno, thank you for your reply. Reading both of the replies it does not make sense to exchange a lower interest rate for a higher interest rate even for the extra $$$. The Rep sure made it sound plausible, she probably could tell I was unsure of myself.

Another Reader, it is comments like yours that truly make this site SO educational. Your comment was eloquently put but yet so simple for the average person to understand. I thank you immensely for that. 

Even after reading so much, I still feel like a complete novice at all this. I'm sure others may have read my question & thought what in the world is she thinking but I appreciate you both taking the time to help newer ones.

Back to the drawing board.......In 2017, after we max our 401k & tIRA we will have extra $$, and I was just looking for a smart way to invest that $$-thinking it was real estate. However, after reading both your comments maybe that could have been a costly mistake at least at this time.

Thank you again!