Home Equity Line of Credit (HELOC)

A HELOC lets you draw, repay and draw again against the equity in a property, most often your primary residence. Investors sometimes use it to fund part of a down payment. That shrinks the cash invested in the rental but adds a second debt payment, and both changes move cash on cash return.

Say $50,000 of the default deal's $150,000 comes from a HELOC at 8.5% interest only. Cash invested falls to $100,000, but the line costs $4,250 a year. Cash flow drops to about $5,260, and cash on cash comes to about 5.3%, lower than the 6.3% without it, because the borrowed money costs more than the property yields.

Whether the HELOC helps depends on the same test as the first mortgage: the borrowing cost against the property's return. It also carries risk to the home securing it, and many HELOC rates float. Include its payment in the deal's debt service, not as a separate personal expense.

Further reading: Home Equity Line of Credit (HELOC) on Wikipedia.