never mind. Used turbo tax and ran both scenarios.
Some things I discovered (someone can verify)…
Assumption. Your household AGI > $150,000
If in scenario (b), the rental produces positive income after rental deductions, there would be no difference between (a) and (b).
If in scenario (b), the rental produces a loss, you would end up paying more taxes with scenario (b) versus (a). Because in scenario (b), you cannot deduct the loss from your income if your AGI is > $150000 (it carries forward to next year).
In practice, (a) also ends up produce the better loan rate in most cases.
*If you get rental mortgage, they typically have a higher mortgage rate than non-rentals. And then if you end up borrowing less than $150k, there’s a surcharge for that too.
*Getting heloc obviously has the disadvantage of the possibility of a rate change. It also complicates things anytime your want to refinance your first loan. I guess the only advantage is that you can take advantage of the intial teaser rate, and that if you pay off the $200k early, you still have your original primary’s loan rate/payment schedule… Disadvantage is that if the investment property is really bad, you cannot simply walk away without risking your primary home.
*Refinancing/cash out on and taking the cash to buy the rental probably gives you the best loan rate for rental property. But if it bumps you from a conforming to a conforming+, then it might not be as cheap. Also, even if you wanted to pay off the $200k early, you’re stuck with the larger loan payment on your primary (even though you’ll end up paying it off earlier)…Also, similar to heloc, you won’t be able to easily walk away from the rental if you need too….
