Author Topic: Oops...Cash out Refi closed, home to purchase fell through...now what?  (Read 1041 times)

tommyj17

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We refinanced our rental property and took out $400k in an effort to purchase a new rental. The purchase fell through and now we are "stuck" with the cash. It has me trying to think more Mustachian about what to do with that money...use the money to pay off our current primary home ($280k left on the mortgage), pay down the current rental (the principle just jumped to $875k), just be patient for another rental, invest in index funds while waiting for a better answer to come (donate 10-15%, etc.), something else? Also, open to the response of, "Why would you have done that cash out refinance?!"

Thanks for any and all advice here...decision fatigue setting in.

Thanks again,
Tommy

Duke03

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You did a cash out to buy another house.  So why not find another house to buy.  I'd just put the money in the bank and start looking for a better deal then the one that feel through.

tommyj17

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Thanks! Thinking maybe a incremental payoff of our primary residence and then save/invest the remaining amounts for that future rental.

solon

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Why would you borrow from a rental and pay off your primary? Isn't the interest rate on the rental higher than the primary? It seems like paying off the primary should be at the bottom of the list.

As long as it still makes sense to borrow from the rental to buy another rental, I would keep going down that path. If it takes a few months or so to find another good rental, that's fine.

tommyj17

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Guess I liked the idea of having our primary residence completely paid off...

waltworks

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You have an $875k loan on a rental property? Where on earth do you have a rental, and how much does it rent for?

-W

tommyj17

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San Fran...$5100 a month

Papa bear

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Ouch...  sounds like you should sell that rental and buy out of your current market.  I wouldn't be holding that property for a rental at this point. 

Point of reference. I have a property in Ohio that is renting for 3800/month and mortgage of 140k. Purchase price of 165k.

Maybe you made a ton of money on appreciation.  Awesome! Get that money out to work for you!


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Dicey

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Ouch...  sounds like you should sell that rental and buy out of your current market.  I wouldn't be holding that property for a rental at this point. 

Point of reference. I have a property in Ohio that is renting for 3800/month and mortgage of 140k. Purchase price of 165k.

Maybe you made a ton of money on appreciation.  Awesome! Get that money out to work for you!
But then Tommy would be in...Ohio. Probably not gonna happen. I expect your eyes would pop at the kind of appreciation he's had in SF.

This is pure gold:
Why would you borrow from a rental and pay off your primary? Isn't the interest rate on the rental higher than the primary? It seems like paying off the primary should be at the bottom of the list.

As long as it still makes sense to borrow from the rental to buy another rental, I would keep going down that path. If it takes a few months or so to find another good rental, that's fine.
You might also enjoy this thread:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/


solon

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Thanks dicey! I was hoping you or boarder would show up here.

Papa bear

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Ouch...  sounds like you should sell that rental and buy out of your current market.  I wouldn't be holding that property for a rental at this point. 

Point of reference. I have a property in Ohio that is renting for 3800/month and mortgage of 140k. Purchase price of 165k.

Maybe you made a ton of money on appreciation.  Awesome! Get that money out to work for you!
But then Tommy would be in...Ohio. Probably not gonna happen. I expect your eyes would pop at the kind of appreciation he's had in SF.

This is pure gold:
Why would you borrow from a rental and pay off your primary? Isn't the interest rate on the rental higher than the primary? It seems like paying off the primary should be at the bottom of the list.

As long as it still makes sense to borrow from the rental to buy another rental, I would keep going down that path. If it takes a few months or so to find another good rental, that's fine.
You might also enjoy this thread:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
You don't have to live in a location to own property there...


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August26th

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Does the property still cash flow after taking out the extra 400K? Iím guessing not, if your total mortgage on that property is now 875K and you are getting $5,100 in monthly rents. If there is a negative cash flow, thatís a burden that you may not need.

You could use a chunk of it (but maybe not all of it) to do whatís called a ďrecastĒ of your primary residence mortgage. It would lower your overall payments and maybe free up some overall outflow while you decide what else to do with the money.

tommyj17

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Yeah, that is one of the concerns with the refi...going from net positive of $1k a month to a negative of $800. Hence the thought of paying off the primary which carries a mortgage of $1700. Just not feeling overly confident in the numbers and in the end it seems to come down the philosophical question that is being discuss in this feed and the larger blog...debt free vs don't pay off your mortgage(s). Not really sure where I currently stand on that...should probably figure that part out about my strategy before refinances occur. 

Dicey

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Ouch...  sounds like you should sell that rental and buy out of your current market.  I wouldn't be holding that property for a rental at this point. 

Point of reference. I have a property in Ohio that is renting for 3800/month and mortgage of 140k. Purchase price of 165k.

Maybe you made a ton of money on appreciation.  Awesome! Get that money out to work for you!
But then Tommy would be in...Ohio. Probably not gonna happen. I expect your eyes would pop at the kind of appreciation he's had in SF.

This is pure gold:
Why would you borrow from a rental and pay off your primary? Isn't the interest rate on the rental higher than the primary? It seems like paying off the primary should be at the bottom of the list.

As long as it still makes sense to borrow from the rental to buy another rental, I would keep going down that path. If it takes a few months or so to find another good rental, that's fine.
You might also enjoy this thread:
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/
You don't have to live in a location to own property there...
Winner! You are 100% correct.

Background: We have three SFH rentals in the same Senior Resort Community. They're about 500 miles south of our primary residence. It's driveable, if necessary, but it's not that easy. One of the properties has a casita, which we keep for ourselves, so we always have a convenient place to stay. I cannot imagine the hassle of being halfway across the country. Even if you hire everything out, that's an additional layer, probably more, of cost and hassle.

Linda_Norway

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Investing in an index fund is something for a longer perspective range. Like if you need the money in 10 years or so. If you are likely to buy another property soon, you should keep it in the bank.

Paying off a mortgage should (if I reason correctly) give you a guaranteed return of the mortgage interest rate minus income tax reductions minus inflation.

If you want to pay off debt, always pay off debt with highest interest rate first.

Lmoot

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Investing in an index fund is something for a longer perspective range. Like if you need the money in 10 years or so. If you are likely to buy another property soon, you should keep it in the bank.

Paying off a mortgage should (if I reason correctly) give you a guaranteed return of the mortgage interest rate minus income tax reductions minus inflation.

If you want to pay off debt, always pay off debt with highest interest rate first.

That method doesnít always wash the cleanest with real estate. If DTI ratio and cashflow is whatís keeping you from being able to invest in more real estate, then you want to pay off the mortgage that will free up the most cashflow, the quickest...and thatís not necessarily going to be the one with the lowest rate. Thatís because with mortgages, the payment wonít go down as long as there is still a balance.

I can see paying off a primary residence first, but I wouldnít do early pay off of investment properties until a) lenders wonít give you any more mortgages/ money or b) Iím finished accumulating properties. In fact I might start refinancing properties down the line, for another 30 years. Mortgages are one of the cheapest loans out there (and highest amount of loan), and that money would be better used investing capital into more real estate, which would get you a better return (both in rental income and potential increase in property value), than paying down a low rate loan.

tommyj17

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I also had someone tell me recently that a potential Mustacian solution would be to build equity in a property, then leverage a HELOC in that property to purchase another with cash (better purchase position), make quick improvement in the new property, then get fixed financing on that property to pay back the HELOC...rinse and repeat to the extent and timing that you can.

Dicey

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I also had someone tell me recently that a potential Mustacian solution would be to build equity in a property, then leverage a HELOC in that property to purchase another with cash (better purchase position), make quick improvement in the new property, then get fixed financing on that property to pay back the HELOC...rinse and repeat to the extent and timing that you can.
This approach is one of many useful tools to have in your Building Wealth with Real Estate arsenal.

toganet

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I also had someone tell me recently that a potential Mustacian solution would be to build equity in a property, then leverage a HELOC in that property to purchase another with cash (better purchase position), make quick improvement in the new property, then get fixed financing on that property to pay back the HELOC...rinse and repeat to the extent and timing that you can.
This approach is one of many useful tools to have in your Building Wealth with Real Estate arsenal.

For more on this idea, see this: BRRRR