Author Topic: Cash out as downpayment?  (Read 1297 times)

reklar

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Cash out as downpayment?
« on: September 05, 2015, 06:58:17 PM »

Here's the situation: I have a rental property which isn't generating much income compared to its value.  For various reasons (capital gains, etc), I don't want to sell.  It's currently worth about $725k and the mortgage on it is down to $165k. It is generating $2400/month in rent, HOA of $125/month, property mgmt of $190/month, very stable tenants so don't really want to raise rent until they move out but haven't raised rent since they rented in 2011.

Does pulling out the equity via a cash out re-fi make sense?  I would use the cash to make downpayments on other investment properties and then finance them separately. 

I guess I could also consider a 1031 exchange, but I'm not sure what to look for in that price range.  I'd like properties that are cash flow positive, but at the higher end of the market not sure where to look (apartment buildings or commercial I guess?).

CashFlowDiaries

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Re: Cash out as downpayment?
« Reply #1 on: September 06, 2015, 07:02:30 AM »
Yes absolutely that makes sense.  Investors do that quite often.  As long as you use the equity you pull out to invest and get better returns then what the current interest you pay it makes sense.  It is a great way to build your Real Estate portfolio.

Another Reader

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Re: Cash out as downpayment?
« Reply #2 on: September 06, 2015, 08:18:59 AM »
Have you checked to see if this is possible?  Lenders are reluctant to do cash outs on rental refinances, and there is usually a significant interest rate penalty if they will.

Have you looked into a HELOC on the rental?  Some lenders will do these because they are not subject to the conventional mortgage restrictions.   You might want to look at a HELOC on your residence as well.  You can pay the HELOC down with the cash flow.

lhamo

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Re: Cash out as downpayment?
« Reply #3 on: September 06, 2015, 09:07:43 AM »
You should start raising the rent, and do so on a regular basis.  Good tenants will not balk at a reasonable increase.  If you haven't raised the rent in four years they are getting a steal of a deal and they should know that.  How much has housing appreciated in your area in that time?  Chances are they would have to pay at least 15-20% more to get a comparable place on the market now, possibly more depending on the market (here in Seattle it would probably be closer to 30-50%).

reklar

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Re: Cash out as downpayment?
« Reply #4 on: September 07, 2015, 10:03:23 AM »

Thanks for the responses guys. 

AnotherReader: Yes, I have checked and it sounds like it is possible.  I have enough equity in the house that they are likely okay with it especially since I won't seek the maximum and keep it under the conforming loan limit of $417k.  The brokers are quoting 4.5% on both the cash out and separate investment properties loan, so pretty good.  I don't like the idea of a HELOC because interest rates are still somewhat likely to rise in my view even despite questionable market conditions.

lhamo, Yes, I think I will explore this option and find out comparable rents.  I don't like lots of turnaround so if I can only raise $100-$200/month it is likely not worth it  ... just on general wear and tear and vacancy alone that's likely a loser financially.   Better to keep long term tenants I think especially in this case as they are somewhat ideal (middle aged professional couple with no kids and no pets).