Cash-out refi in bank account. Use it for rentals, side business or...?

[omega13]

Hello everybody,

I was hoping to get your feedback on my recent cash-out refi as well as some of my current financials to make sure I'm on the right path for FIRE. I'm happy to do a case study if the numbers seem confusing or if this does not seem like enough info.

I finished the cash-out refi on my primary residence last month with the goal of using the money for a down payment on one or more rental properties as well as getting some capital for a side business. This was something I thought long and hard about and in the end I decided to go for given the low interest rates compared to my original loan.

I was initially torn between the two schools of thought...pay mortgage down vs. leverage wisely to increase your wealth and net worth. Also thought hard about getting a HELOC instead. After much deliberation, a cash-out refi seemed like a better long term choice given the low interest rate and the belief that careful leveraging would help me increase my net worth alongside maximized savings.

Details:

Original loan:
Purchase price: $195k
Original rate: 4.875%
Balance at time of refi: $155k (6 years into a 30 year loan)

Refi loan:
Refi amount: $236k
New rate: 3.5%
Loan term: 30 years
Closing costs: about $3.5k
Property value at time of refi: $295k (now has gone up to around 310k)
Cash out amount: $77k

I live in a sellers market hence the unusual increase in home value. The refi took quite a long time and now finding rentals (SFH and MFH) that pencil out has become increasingly more difficult.

However, I have not given up and am considering starting out with manufactured homes or SFH that are further away to maximize the monthly cash flow. The plan I have so far is:

1. Put a portion of the cash towards a down payment on one or more rentals. If I find a property in the 150k range, 20% would mean about 30k down in one of them. So not to put all eggs in one basket and leave more for possibly another rental. Lots of people seem to be doing flips in my area but these seem overly risky given the high property prices in the current market.
2. I have budgeted about 5k for a side business. Researching Amazon FBA program or a small consulting company for side gigs.
3. The money is sitting in a 0.05% checking account. Dump it in an account like Ally or CD of some sort until I find a rental.
4. Sell the house and move. (Pro: find a house in a non-HOA community (currently), cash out on the additional appreciation. Con: In a seller's market, you sell high, you buy high.)
4. Last resort. If nothing pans out, put it back towards the mortgage. This would suck since I would lose the closing costs.


With regards to retirement accounts, for this year I have:

1. Maxed out the 401k through my employer. They match up to 5% of my income as well as contribute a profit sharing amount. Total deposited is about $30k.
2. Maxed out a Roth IRA through Vanguard invested in VTSMX. ($5.5k)
3. Signed up for a newly available HSA plan and will be contributing enough monthly to max by the end of the year. ($3.4k)

I have no other debts, and over 9 months of expenses in an emergency fund. I also have a Solo 401k but that's a topic for a different thread :).

I've been reading up as much as possible on the MMM threads catching up on as fast on the mustache wisdom as possible. I feel that the wealth of knowledge here has given me the guidance and the motivation to push for FIRE as soon as possible.

The questions I have are:

1. Was it a bad idea to do the cash out refinance and plan to use that money for a rental down payment? I have read some threads about paying off mortgage early not being the smartest thing when rates are low. How about borrowing more though?
2. Does it make sense to sell the house and cash on the appreciation? My thinking is that either I find a rental or in a year I convert my primary residence to a rental and find a cheaper fixer upper to live in myself.
3. Anybody have any experience with the Amazon FBA program?
4. I am currently in favor of finding a manufactured home rental more than an SFH/MFH given the low entry cost and the difficulty of finding rentals that cash flow here overall. However, I need to learn more about them. Anybody here that has experience with them and is open to talking?

Please poke holes in my plans so I can get better at this. What would you do?

Really appreciate your input and I hope you had a Happy Thanksgiving!

O.

[omega13]

Anybody?

[gliderpilot567]

I will bite...

I didn't see "last resort: Put it in a taxable account index fund." Actually that would probably be my first resort, read on...

First off, I ran a very quick amortization scenario on your old and new mortgages. I had to make some assumptions, but you can probably clear them up pretty fast. Mainly, I am assuming the 195k you quoted was the financed amount, not the total purchase price, since you didn't say how much you had put down.

Old mortgage P+I: 1032/mo. New mortgage: 1059. I assume taxes/insurance are the same (why wouldn't they be) and that neither loan has PMI. From a monthly cash flow perspective, you are about the same, as the $27 increase is in the noise.

In the meantime, now you have 77k in cash. Less the closing costs obviously. If my assumptions above were right, you had paid about 74k of P+I over 6 years, of which 24k was principal. So from a cash in to cash out perspective, again it looks like you did ok, as if you had lived there the last 6 years for "free". Again ignoring taxes and interest.... it's like you got all the P+I back out.

I would now look at it through the lens of: what is the power of the 77k. Using the 4% rule, 77k is worth about $3080/yr. Without going into specifics about which investment vehicle to use (which I know is the main point of your question) using the 4% SWR you'll now have recouped the closing costs within the first (upcoming) year, and have a nice chunk of cash to do what you want with. Which now is getting to your question.

If I was in your shoes (and my pencil-thin-stache investment accounts are currently funded to a similar order of magnitude as yours) then I'd invest the cash in index funds, in taxable accounts as necessary, while continuing to max out the rest of the stuff. I too am interested in eventually getting into rental real estate, but don't want to start on that until I have a nice solid stache of "lazy" investments compounding and working for me. For me, that means a nice fat figure in index funds... it could mean something else for you. But 77k even in a taxable account will nicely kick start wealth accumulation. Again, at 4% that's 3k a year (on average), which is not bad. A really good rental property would gross more than that, but I am not the expert on running rental numbers.

Others may chime in regarding your other ideas. 5k for a side business sounds high to me unless you have a killer business plan. Which you might, who knows. Again, I would park that 77k in an index fund in a taxable account and watch what it does for a year or two. It may give you some different ideas besides what you've listed above.