Author Topic: Should I cash-out refi to buy a second rental property?  (Read 1677 times)

bittheory

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Should I cash-out refi to buy a second rental property?
« on: September 12, 2016, 03:52:14 PM »
Needing some Mustachian advice on my situation regarding a cash-out refinance.

-I own a rental home in Denver that cash flows well. It was my former primary residence, but 4 years ago it became a rental. Rents have steadily increased YOY.
-Even though it is discouraged by some, I have been putting additional principal into the mortgage in order for it to become a "college fund/soft FIRE plan" in 14 years.
-A friend of mine who owns several rentals in the area told me to consider doing a cash-out refinance in order to have the down payment cash to purchase 1-2 more properties. "Why control $300,000 worth of real estate when you can control $600,000. A cash-out refinance can allow you to do that." He makes a strong point.
-I have always been interested in purchasing a second rental property, but have been saving in order to do that. However, a cash-out refi would allow me to do that on a much faster timeline, but would start me at a new 30-year mortgage.
-Current stats on the property: 4.6%, 21 years remaining on the loan.

My question to the community is should I pursue this cash-out refi (I was quoted a 3.875% rate today), should I stay put or should I consider an alternative approach altogether?

NoNonsenseLandlord

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Re: Should I cash-out refi to buy a second rental property?
« Reply #1 on: September 12, 2016, 04:34:54 PM »
Leverage is great, until it isn't.

I have been paying my rentals off, as I have plenty of cash flow.  A HELOC may work better, if  you can get it.  There are a lot of extra fees/points in a refinance, especially if it is non-owner occupied.

bittheory

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Re: Should I cash-out refi to buy a second rental property?
« Reply #2 on: September 12, 2016, 04:48:13 PM »
Leverage is great, until it isn't.

I have been paying my rentals off, as I have plenty of cash flow.  A HELOC may work better, if  you can get it.  There are a lot of extra fees/points in a refinance, especially if it is non-owner occupied.

Did you not use leverage to acquire your rentals? Just curious. A HELOC is also an option I'm considering. I'm also considering doing nothing, and simply continue slowly paying down my rental on a timeline that meets my goals.


Papa bear

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Re: Should I cash-out refi to buy a second rental property?
« Reply #3 on: September 12, 2016, 04:53:19 PM »
Where are you getting 3.875 for a cash out refi for an investment property?

I would consider doing this with 2  conditions: 

1) you are going to get serious about real estate as an active approach and will devote more time and effort into your business.

2) you only do this if you find a property that is an incredible find that you can't finance it with traditional methods and down payment. Don't borrow money from your cash flow unit unless it's an outstanding investment.


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bittheory

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Re: Should I cash-out refi to buy a second rental property?
« Reply #4 on: September 13, 2016, 09:48:20 AM »
Where are you getting 3.875 for a cash out refi for an investment property?

I would consider doing this with 2  conditions: 

1) you are going to get serious about real estate as an active approach and will devote more time and effort into your business.

2) you only do this if you find a property that is an incredible find that you can't finance it with traditional methods and down payment. Don't borrow money from your cash flow unit unless it's an outstanding investment.


1) I am getting more serious about real estate. I feel I can handle one more rental property that I actively manage.

2) Good advice. In today's market (Denver) that might be impossible for a while.

While I agree with point #2, I can also see the argument that by borrowing against my current property, I can in turn double the amount of real estate I control. And if for some reason I can't find the outstanding investment property, I can always put the money back into the principal reduction of the the property. Thoughts?

Papa bear

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Re: Should I cash-out refi to buy a second rental property?
« Reply #5 on: September 13, 2016, 03:17:08 PM »
Why borrow against your cash flow house for a fair investment though?  You might be managing more real estate, but if it's not a good deal, you may as well buy index funds. 

I recently purchased a new rental outside of my current metro area.  There was nothing that I found that met my minimum criteria for a new investment. I'm considering purchasing more in this other market.  I would consider cashing out my paid off rental if I had no other traditional financing. 

Go find an outstanding property then figure out how to pay for it.  I'm sure you can come up with many ways to leverage, including financing your other property.


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waltworks

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Re: Should I cash-out refi to buy a second rental property?
« Reply #6 on: September 13, 2016, 09:16:54 PM »
I have a hard time imagining that any place in Denver hasn't appreciated enough that it's now a pretty terrible rental as compared to market value. But that's beside the point. If you want to get into rentals more (and you find some you want to buy), and you don't have the cash... then you could leverage the existing house to do it. Adds risk, potentially adds reward. Standard TANSTAAFL situation, really. If you've got some place(s) in mind, I'd probably go for it. If not, I'd sit tight.

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bittheory

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Re: Should I cash-out refi to buy a second rental property?
« Reply #7 on: September 14, 2016, 09:44:24 AM »
I have a hard time imagining that any place in Denver hasn't appreciated enough that it's now a pretty terrible rental as compared to market value. But that's beside the point. If you want to get into rentals more (and you find some you want to buy), and you don't have the cash... then you could leverage the existing house to do it. Adds risk, potentially adds reward. Standard TANSTAAFL situation, really. If you've got some place(s) in mind, I'd probably go for it. If not, I'd sit tight.

-W

True, there are still some deals to be found if you look pretty hard. A lot of them are in the suburbs.

I think I'm going to sit tight for a while and see where rates are early next year.