Author Topic: Should I cash out refi?  (Read 1174 times)

AZfamilyof4

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Should I cash out refi?
« on: January 13, 2018, 09:27:21 PM »
The question: Should I cash-out refi my rental property in order to purchase more rental properties?
The house: 100% occupied past 5 yrs. purchased for 220k currently owe ~195k. Cash flow $1280/mo currently. Homes have been selling in the neighborhood for 350k so I believe we have ~150k in equity.

I have lately considered a cash-out to withdraw 100k. There are several properties in my area I've been eyeing and I believe I can purchase possibly 3-4 homes at 20% down and financing the other 80%. The plan would be to purchase said houses for long term rentals. My concern is that the market is high (great for the equity in my rental, bad for purchasing other properties).  I believe that with some cash and hard work we can find distressed properties and I consider myself fairly handy.

Perhaps a good idea may be to withdraw the equity money and wait for the market to turn? I hate for money to just sit around.  Any help would be greatly appreciated.

Thank you

midwesterner1982

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Re: Should I cash out refi?
« Reply #1 on: January 21, 2018, 12:50:26 AM »
First of all, congrats on your success.  It sounds like you have a great property!  I'm also considering a cash out refi on some of my rentals.  Here are a couple things I'm thinking about:
1) where you see your local RE market going in the next few years.  Sounds like you have great cashflow so after your payment increases after a refi you'd still have some cushion if the rents decreased due to a market turn or something.
2) Your personal philosophy about risk. Sounds like you're more averse to idle equity than debt. I personally see higher inflation coming so taking a fixed rate now can be a way to pay back the loan with cheaper dollars in the future (with the tenants' money :).

I have a link below about this topic from a blog I like.  I started reading Mark's blog when I was preparing to buy my first property.   I like that he presents information in very plain language that's easy to understand.  Hope it helps you.  I also like podcasts from therealestateguys but there are many others like bigger pockets, etc.  Therealestateguys talk about how they got stuck in the 2008 financial crisis so they always recommend having cashflow to cushion against a market turn and always having multiple exit strategies.  Good luck!

[https://investfourmore.com/2013/09/06/how-does-a-cash-out-refinance-on-rental-properties-work/]

clarkfan1979

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Re: Should I cash out refi?
« Reply #2 on: January 21, 2018, 01:49:18 AM »
If your rental house appraises at 350,000, your loan will be 75% LTV, which is 262,500. If you owe 195,000, that leaves you with 67,500. Consider $3,500 in closing costs and you are left with a maximum of $64,000 to pull-out.

I just did a cash-out re-fi on one of my rental properties last November. My old rate was 4.75% and from 2009. My new rate was 4.625. It appraised for 358K and I was able to pull out 145K.

If you purchased for 220K and you still owe 195K you probably bought as owner occupied with 5% down and an owner occupied rate. If owner occupied rates are currently 4% you will pay 4.75% for a cash-out re-fi.

You also need 25% down to purchase investment properties unless you want to move again and intend to live in it.
« Last Edit: January 21, 2018, 01:53:55 AM by clarkfan1979 »

Another Reader

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Re: Should I cash out refi?
« Reply #3 on: January 21, 2018, 04:36:44 AM »
Are you in Arizona?  The Phoenix area?  If you are, I don't understand how you could find anything right now that is cash flow positive.  Houses requiring work are discounted less than the cost of the work because there is so much competition right now. 

I would need to see your operating statement to see if I agree you are really $1,280 cash flow positive.  The numbers just don't add up, based on what you stated.

AZfamilyof4

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Re: Should I cash out refi?
« Reply #4 on: January 21, 2018, 10:37:12 PM »
Midwesterner1982, thank you for the reply. Bigger pockets has been a great source for my wife and me also. As for the amount we are able to refi, a couple banks local to us have told us they would do it at 90% ltv. So if that ends up being the case, it leaves us with up to 120k to pull out.

It's not so much that we are trying to avert money lying around; I am concerned that by pulling money out (assume approximately $500/mo for my 100k cash out) and the market does not turn or I am unable to find a great deal, then that can certainly add up over time. $500/mo is $6000/yr etc etc.

I did purchase this property as a primary residence originally. I purchased it as a VA loan with 0% down and paid ~$4000 in closing costs, home inspection, and a couple very minor repairs. It is currently rented to college students who pay by the room. The property is still cheap for this area so close to a college campus and students in the dorms are paying wayyyyy more for a shared room, public bathrooms, and no kitchen. We are about a mile from campus. I am NOT looking to purchase another home as a primary as that stage of my life is over and my wife and I have children.

Anyway, I'm off my tangent (as much as I appreciate other people telling me about my financial positions). I will agree the deal was sheer dumb luck. A combination of good timing and not much else. Which, of course, is why we've been so hesitant to mess with it. I read a lot, but am overall not a very sophisticated investor. This is still new and unfamiliar to us.

midwesterner1982

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Re: Should I cash out refi?
« Reply #5 on: January 22, 2018, 07:07:58 AM »
Midwesterner1982, thank you for the reply. Bigger pockets has been a great source for my wife and me also. As for the amount we are able to refi, a couple banks local to us have told us they would do it at 90% ltv. So if that ends up being the case, it leaves us with up to 120k to pull out.

Wow, that's great your bank would let you go down to a 90% LTV.  My bank caps it at 80% LTV for investment properties.  The kind of appreciation you're seeing is pretty awesome.  My area is more of a cash flow play with maybe 3% appreciation per year but the tenants are stable with good cash flows.  Good luck to you going forward.

srad

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Re: Should I cash out refi?
« Reply #6 on: January 22, 2018, 12:49:33 PM »
I went this route just over a year ago.  Refi'd my longest held rental that had 9 years left till it was paid off and purchased 3 duplexes.  I'm now making more cashflow on those 3 duplexes than i would of made when my original rental paid off.   

One thing id suggest, pull the money out now.  Rates are low and probably aren't going to stay there too much longer, and deals become much more real if you actually have the cash on hand to buy them.   You don't want to wait till the market corrects, you want to wait till you find the right deal.  And when that deal comes up you can make that much stronger of an offer because you have the money to close.

alwayslearning

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Re: Should I cash out refi?
« Reply #7 on: January 22, 2018, 02:08:05 PM »
Have you considered a HELOC?