Emergency Cash Acct: $20K - (Liquid) -Earning 3% interest.

Home Equity LOC - $20K - Costing me 3% to carry this balance.

Does it make any sense here to use the Emergency Cash Account to pay-off the HELOC?

What would you do? (Doing nothing is an option here)

Plenty,

If I pay-off the HELOC,...I will still have a $50K HELOC for emergency cash needs. There are some Mr. LL soothsayers here that advise to 'not put your primary residence at risk' and that is what a personal HELOC can do.

Maybe the real question here should be: should I continue using a HELOC to help fiance my short term cash / business needs?

the time to have opened LINES of credit is when you don't need them. Same with Cc's. The TV commercial that says "whats in your wallet" for RE investors should be "what line of credit do you have open".

I'm with RathdrumGal! That was my first question as soon as I read it! Where you are getting 3% on $20k in an emergency fund that is readily available??

- John...

I would walk right up the Dave Ramsey Baby Steps.

1) Set aside $1000 Starter Emergency Fund. I would do this today.

2) Pay off all non-mortgage debt. There's almost enough to get this done. Finish it up next month out of cash flow. Once the HELOC is paid in full, close it.

3) Start building up a fully funded e-fund of 3-6 months of expenses. Figure out how much cash you'd need to survive for at least 3 months based on past numbers for mortgage debt-service, vacancy, repairs, taxes, insurance, capital improvements, etc.

Last month we finished funding our rental emergency fund. Took almost a year of setting back extra cash flow. I have peace knowing we have cash to cover emergencies, vacancies and regular repairs and have NO DEBT other than what remains on the mortgages. The peace is compounded by the fact that, even if the banks go haywire tomorrow and decided to cancel all open lines of credit, we have cash in the bank to survive.

Sid,

Roy here goes-- if you don't want the emergency fund any more use the funds to pay off the HELOC.

Just remember when you use the emergency fund you won't have it in an emergency-- which is why you set it up -- I suppose?

Roy, I'm not sure if your comment about simple answers was directed at other posters or me. Regardless, I tried to keep my answer as simple as I know.

You're familiar with Dave, I know, so I'm just reminding you of how he'd do it, which is how I'd do it.

The details are here for other readers who, like me, are not fans of debt for real estate investing and who haven't heard of his plan yet. It's good to see how someone applies it to business finance.

I would never close a HELOC. pay it down or off but not close it. you're an active real estate investor. without putting a lot of thought into your prior posts, I seem to recall you are a buy and hold kind of guy. Liquid cash, no matter how much, is the key to your flexibility and keeps open or opens many new doors for you. I cannot imagine being in the real estate business (or any business for that matter) without accessibility to money on a quick basis and HELOCs are one of those methods.

Roy: The problem is that Sid's advice -- which is Dave Ramsey advice -- is simply not always the best FINANCIAL move. As I've said before, Dave Ramsey is primarily intended for people that do not manage their money well. THAT is why it is so anti-debt. And that is why Sid/Dave's advice would be to, of course, pay off and CLOSE that HELOC. Even though most of the rest of us know that that is likely NOT a good idea. As Nicole said, closing the HELOC once paid down makes very little sense. (Again, unless you are Sid/Dave and so adverse to debt because you think you cannot handle it.)

I personally think that all of the Dave Ramsey advice does a disservice to most here. Most of us here DO know a bit about managing our money. We're not slaves to debt that don't know how to get out. Again, Dave Ramsey is mostly aimed at people that did not handle their money well. That does NOT appear to be the case with you.

But that's why you don't get a simple answer out of Sid. Because his/Dave's advice is aimed at an admittedly large group of people in the world that are poor managers of their money. But you are not one of them.

- John...

I vote for do nothing.

Dont see a big risk here with the amounts, and you will be paying down the loan.

But also you dont know what could happen. And always good to be able to have options for cash.

I had a 150K line open for years. Have not really had to use it for about 10 years. But every few years would take 5K out and pay it off in a 2 months, just to keep it active.

Well bank decided they needed to close the line since there was not enough activity. Really costing them more to carry on their books than they were making.

Of course offered to let me open another line with a yearly fee. But had to reapply.

Did not really need it, have a few of other options, so was not worth my time to try one from a different bank.

Does it make any sense here to use the Emergency Cash Account to pay-off the HELOC? - Yes, it makes sense because you will be less at risk by carrying less debt. Debt = Risk.

What would you do? (Doing nothing is an option here) Build an emergency fund out of retained earnings, selling an asset, or income generated. Then pay of the loan.

You are correct to maintain cash reserves.

John...[MI] is incorrect as to the reason why Dave's advice is 100% correct for all people and also regarding who is the target audience. To correct his misunderstand, I will simply say the target audience for me and Dave is everyone. True and smart principles don't cease to be true and smart regardless of one's net worth or how "good" they are with money. I post Dave's teaching on debt because they are 100% in line with God's Holy Word, the Bible, which is the cornerstone of my life and faith-walk. I cannot do say anything else or be persuaded there is any other way. My words are His words.

Sid: Call me incorrect all you want -- but if you REALLY think that blanket financial advice from ANYONE is always good for EVERYONE, then I think we'll just have to agree to disagree.

Can you really not see that Dave's advice is targetted at specific types of people? Sure, SOME of it may apply well to MOST people. But to say that his advice -- which, again, was really originally intended for people in financial CRISIS -- is great advice for EVERYONE is just crazy talk to me.

- John...

P.S. I will also disagree that ALL of Dave's advice is "100% in line with God's Word and the Bible." But that's another discussion entirely... The man is not God. He doesn't speak for Him.

"Does God have any position on pvc or abs?"

Luke 14:28 "Suppose one of you wants to build a tower. Won't you first sit down and estimate the cost to see if you have enough money to complete it?"

While I don't believe Dave's advice is right for everyone, Sid is right in this case. I agree Roy should pay off the HELOC then follow Dave's steps. (I personally prefer about a $5k emergency fund and a years expenses.)

I should clarify that I also agree with most of Sid's advice here -- except for the "close the HELOC" without any reason part. There are good reasons to keep the HELOC available for the future -- and usually minimal-to-zero costs involved in doing so. He's closing the HELOC just for the sake of being Ramsey-ish -- not because it necessarily makes good financial sense for the future.

Especially when, in the process, he's shrinking his emergency fund to $1,000 or so. If he's going to reduce his emergency fund considerably and then plan to build it up over the next 3-6 months (as Sid said), then he makes even MORE sense to leave the HELOC open "just in case."

- John...

I cannot think it would be wise to use a HELOC as an emergency fund. If someone is cash poor and an emergency strikes, that would be the worst time to load additional debt onto real estate. Gasoline on the fire.

We don't need to discuss about whether ALL of Dave's advice is 100% in line with the Bible. The topic at hand is Roy paying off debt and closing the HELOC, so if there's a disagreement with Dave's advice about mutual funds, for example, it was not my intention to convey that meaning in this post. Apologies for lack of clarity. I will say, however, that I haven't found any of his advice that is contradicted by it.

Ok, well, as I said, we can agree to disagree. If you're telling a guy with $20k emergency to reduce that to $1k emergency to pay off a debt -- then I think it is crazy to also tell him to close a HELOC.

While I agree that, in general, using a HELOC for an emergency fund is not wise, in THIS case, it makes more sense than CLOSING THE HELOC FOR NO REASON.

What you are suggesting eliminates all of his emergency fund in order to pay off an existing debt -- and then you tell him to further eliminate the one remaining thing that he could use for an emergency "just in case." That seems crazy to me.

But, again, I'm done arguing about it. We can agree to disagree on this. I simply think it is a bad idea for him to reduce his emergency fund to almost nothing and then close the HELOC that wouldn't cost him anything to keep around. If Roy suddenly needs $5k for a new septic field next month, then I don't think using the HELOC to cover that would be "the worst time to load addition debt." He has other property to fall back on in case of a REAL emergency. Using the HELOC is better than selling those for a septic field, IMO. If you disagree, so be it. But, if you do, I think you do because you are at an EXTREME when it comes to no-debt -- as opposed to making a financial decision that makes sense to the majority of the rest of us.

You can love no-debt all you want. I still don't think it is the "wise" option here.

- John...

this is a good topic for lunch!

You wrote:

Maybe the real question here should be: should I continue using a HELOC to help fiance my short term cash / business needs?

The real question is what is your risk level... it's sorta wash? 3% interest on each side, perhaps there is a difference in how it's applied/collected or charged? Anyways, it's more of a risk level questions (?) Perhaps?

if you'd sleep better knowing it's all paid off then paid if off, you you are more comfortable with cash in the bank, then leave it alone.... just thinking.

To all: I have no intention of closing down my $50K HELOC. Also, my emergency fund in this scenario is blue chip stocks that pay roughly 3% in dividends.

Thanks Mickie for that short answer,...'short, sweet and to the point',...that is how I like it. Start using the ABC spell checker!

Sid- There is nothing wrong with your Ramsey answer, however, I knew it would create some controversy here and get you flamed. I was hoping to avoid that.

History Lesson: Dave Ramsey use to be a real investor and back in the 80's using No Money Down strategies, he over-leveraged himself into bankruptcy and lost all of his RE. I do think Dave Ramsey's advice is good for anyone who invests money in RE. Like everything else, you can take it for whatever you think it is worth.

Razorback is the Shrubber we seek, a true man of science.

I don't like cash reserves for emergencies. Rentals seldom have emergencies.

JR and Homer,

In 2006, I use to bank with Wachovia and I opened this $50K credit line when I started buying fixer-uppers 10 years ago. In 2009, when Wells Fargo bought Wachovia for pennies on the dollar, I assumed they (W.F.) would close this credit line then, but they did not. When the buy-out dust settled, Wells Fargo was twisting my arm to open another credit line,...which I did under pressure from a Wells Fargo bank branch manager.

Steve,

I have more than one emergency fund. In this post only, I am referring to blue chip stocks that pay cash dividends at approx. 3 percent. If you are willing to settle for 3%, call a broker and place an order for some XOM.

RichE [IL]), that was a great reply :) lol

Steve,

Roy said Blue chip stocks returning 3% dividends.

Roy,

IMHO, if I were in your situation. I would cash out the stock while the prices are good, save a small emergency fund (1k - 2k), pay off the HELOC. Take whatever I was paying on the HELOC and add to the emergency fund every month, look at pumping up the intensity and filling the emergency fund much faster.

I don't like the idea of HELOC's for long term situations, rates can change, its easier to call it etc.

Agreed -- I think Bit's advice (and it was mentioned above too by others) is the best way to do this. Pay off the HELOC (or most of it), keeping a bit for emergency. Then build it up over the next 3-6 months.

I'd simply keep the HELOC available just in case in the meantime -- since you are depleting so much of your "emergency fund" in the process and will have months before it builds back up again.

- John...

Dave Ramsey gives good advice, but it is not best for everyone. He is a personal finance guy--in my mind this is a business discussion!

I would not consider stocks an emergency fund. An emergency fund is money I KNOW will be there if needed.

No way I would close out a HELOC with no balance.

I just bought a new HVAC system and water heater in the same month. I'm small potatoes--five SFR's and a duplex. But what if two of my houses needed that in the same month? What if one of my units is vacant that month? Yes--I can handle it. Because I KNOW I have money set aside, enough that I can sleep at night. Scale your available funds for your business, and keep the worst case scenario in mind.

Roy,

My short answer: No.

General answer: I'm always tickled when people say the advice of a multi millionaire does not apply.

When I hear that I walk away.

.

Can we learn for a guy who invested traditionally in RE, lost it all, declared BK, clawed his way back, paid back the BK's debts, worth millions now and a company of 300 employees, all debt free...I will listen!

EVERY well run biz needs an emergency fund of cash because shirt happens.

Not to confuse, but we keep cash on hand, I tend to keep it in use and rotating, AND keep the HELOC open in case we have a big emergency.

I think where most LLs fail is to not keep enough on hand then panic when a furnace goes out. Gang, we're in the house biz - furnaces go out, housebeaters smash houses - it happens. It's a daily part of LLing.

They panic and use their credit cards, creating more debt.

Roy,

We set back a few hundred $ per house and that seems to be fine. Large expenses are usually one house at a time so we can dip into the account when needed and restore it until the next large expense pops up.

At our age we should be accumulating cash in retirement style accounts.

Consider selling ONE house and that HELOC debt will be gone forever! With your abilities you can easily replace that one house in short time.

BRAD

Why would you ever close a HELOC? They are a wonderful tool to buy a good deal quickly and are cheap!

Put equity to work don't let it rot!

Pay the $20k down as you go, keep the cash on hand! Cash gives you maneuver room if things go south or a deal pops up.

I look at it like Kevin O'Leary your working capital are soldiers! Taking your $20k in the bank and paying a 3% note off is like throwing a perfectly good division into Stalingrad. Nope not happening. Put those guys to work in a nice deal and multiply them.

Brad: First, what was said that the advice (even of a multi-millionaire) does not necessarily apply to ALL people. Especially when the advice was not about this specific situation -- but was instead general advice giving to a specific TYPE of person.

Also, it seems odd for you to say that when you also just disagreed with Ramsey, right? Roy asked if he should should use his "emergency" money to pay off the HELOC. You responded with just "No." Yet Ramsey's advice (according to Sid) would be YES.

So, aren't you also disagree with Ramsey's advice? While in the same breath saying that we should be taking his advice? I'm confused since you seem to be giving two conflicting answers here. (At least with your "short answer: No" comment.)

- John...

I didn't realize the $20k was in stocks until I read further.

IMHO an emergency fund is simply cash in a bank account somewhere. I happen to keep mine in the same checking account that I run each property out of, to simplify accounting.

So you need an emergency fund. I'd forget about the HELOC balance for now since the payments are probably what $150 a month? I'd start building up a cash reserve fund.

Add up what it would take to run your properties for 6 months, and that's your number.

The HELOC would get paid up but would stay open. Then use the HELOC as your emergency account. Where using your primary home as collateral isn't the best situation, you need to consider what would happen if there ever was a default on any bank loans......the banks would be chasing after your home especially if it was paid off.