debt repayment question

[Luck_Club]

The next phase in my retirement plan is to repay debt at an accelerated rate. I have about $530K lump sum of cash to deploy. My preference would be to obtain a new HELOC, retiring my mortgage and increasing my HELOC to 80% of my home value. The bank offers a unique product which has a 35 year draw period (i'm 50 ). The appraisal came in at $675K.

For various reasons which they haven't disclosed they want to completely ignore certain income streams, and not count assets I hold. For example I sold a property and am hold a 3 year baloon note worth $90K that has a 5.5% interest only payment beginning this month. Sorry that can't count as income, because it wasn't on 2016 tax return. The $25,000 carryover loss takes away from my income. I am truly in the dark as to why they are dragging their feet on approving the line increase. Back of the envelope looks pretty safe from my perspective, with nearly double the income/ cash flow required to qualify. If it wasn't for wanting the ability to pounce on opportunities I wouldn't even care.

So my original plan was to prepay my first mortgage and 1 rental mortgage, and this would give me plenty of capacity ($400K+)to add more rentals as a cash buyer. If they don't rewrite the line, should I hold the cash for investment opportunities, prepaying just the 1 rental mortgage, leaving the now non-deductible primary loan, and a bunch of cash earning 0.5%?

If they rewrite I'm golden, and know the path to take. If they don't I'm struggling with the balance between holding the cash for opportunity, and freeing up cash flow. My plan is to buy 1 more rental at some point, and possibly a second home in Florida which may or may not be rental material, so I kind of need about $400K liquidity or easy credit.

Thoughts, suggestions?

 

[Another Reader]

You know the interest on that HELOC is no longer deductible, right? I can show on my current draw that the money was spent rehabbing a rental, so I think there is a good chance I can deduct the interest, per the CPA. Refinancing a first into a HELOC? Don't think that will work.

I can't answer the question about the mortgage on your principal residence without seeing all the numbers, but if the interest rate is low and fixed, I would probably just ride it out and hold the cash pending acceptable investment opportunities. If the rates are high on any of the rental mortgages, I would tackle those.

I don't know where you invest, but it's going to take a lot to pry money out of my pocket to buy more properties because of the run up of the last few years. A simple 20 percent decline will not bring the cash flow to an acceptable level. I am paying off mortgage debt and saving cash to buy the next asset class to crash. I have two 5.875 percent mortgages left and they will be the next to go.

 

[Luck_Club]

You know the interest on that HELOC is no longer deductible, right? I can show on my current draw that the money was spent rehabbing a rental, so I think there is a good chance I can deduct the interest, per the CPA. Refinancing a first into a HELOC? Don't think that will work.

Yes. I lose all incentive to itemize after 2017. The Equity line is for opportunities to invest, where I could later finance, but to add strength to my offer, I would be all cash.

I can't answer the question about the mortgage on your principal residence without seeing all the numbers, but if the interest rate is low and fixed, I would probably just ride it out and hold the cash pending acceptable investment opportunities. If the rates are high on any of the rental mortgages, I would tackle those.

The rate is lower than the investment properties, but it is about flows, and reserve capacity.

I don't know where you invest, but it's going to take a lot to pry money out of my pocket to buy more properties because of the run up of the last few years. A simple 20 percent decline will not bring the cash flow to an acceptable level. I am paying off mortgage debt and saving cash to buy the next asset class to crash. I have two 5.875 percent mortgages left and they will be the next to go.

Yes deals are difficult to find, but they are out there. I look about 1 time a month so not going crazy to find anything. I'm really beginning my debt elimination phase, but would like 1 more property to add some more cushion to the cash flow. I just relisted a rental and bumped the rent $150 a month, and the phone is ringing!

 

[Another Reader]

Generally, I like the idea of a HELOC to acquire, rent, refinance and repeat. Much easier than going through a mortgage process when you are looking for deals. However, I'm having trouble following your numbers without interest rates and balances. What happens to the $530k cash you have now if you do this?

 

[pb4uski]

....Thoughts, suggestions?

Find a smarter lender?

 

[Luck_Club]

Find a smarter lender?

Agreed. Most have a 10 year draw period, and they have a 30 or 35 year draw period. Effectively the last HELOC in my life time.

 

[Luck_Club]

Generally, I like the idea of a HELOC to acquire, rent, refinance and repeat. Much easier than going through a mortgage process when you are looking for deals. However, I'm having trouble following your numbers without interest rates and balances. What happens to the $530k cash you have now if you do this?

Without getting into the mud, I have a bit over $600K in debt between Mtg & rental debt, and very little in non-retirement marketable securities.

I will use the 530K in gifts and cash to pay off debt, fund roths for the family, leaving about $60K to cover 1 years living expenses. If all goes according to plan, I will be able to retire all the debt by the end of the year using the cash & earned income from 2018. Still planning on 2018 & 2019 earned income.

I know I eventually have to get to a debt free position, to execute the FIRE plan, but want to unwind it as strategically as possible. knocking out the NON-DEDUCTABLE house mtg followed by the passive loss to passive income rentals, seems like the most logical plan of attack.

The lack of the HELOC increase throws a potential wrench into the plan.

 

[FlaGator]

Welcome to the world of the leveraged RE investor.

You're "in the dark" because you haven't spent any time on that side of the desk. You know your CF, NW, etc., but the person on the other side of the desk does their job based on guidelines, not how clever you are and what "assets" you may have. Frustrating as a borrower, but if you want the "best deal", have to play by the rules of the people offering that deal.

Looking for a "smarter lender" is a good tip, but given the details you've shared, I predict you'll pay more than a W-2 borrower with a simple tax return, if you find one.

No tips on what to do if you don't get it approved. Your game was never mine.