Author Topic: Should I do a cash out refi?  (Read 2644 times)

Tbill

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Should I do a cash out refi?
« on: November 30, 2014, 02:50:07 PM »
I currently own one rental property that's is doing well and I would like to buy another. I'm trying to determine what my best strategy to proceed is. Current property: Purchased 3 years ago as primary residence and moved out to rent it 6 months ago. I think based on what homes are going for in the neighborhood the house is worth 115k-120k. I bought cheap because it was a bank owned property and needed some repairs.

Purchase price:          91k
Current loan amount: 71k / 30 year mortgage
interest rate:             4.875%
P&I payment:            $397
Monthly Tax/Ins         $216
Monthly Rent Collected  $1200

So I'm cash flowing about $587/month on this house and I could probably raise the rent $50-$100.

Other Info:
Cash on hand 15k
401k balance 11k
32 yrs old married with kids
Monthly take home salary after health ins and 401k deductions $3400 + 5k/yr bonus

I have a very unmustachian FIL that purchased a vacation home that happens to be within driving distance of my job. I currently live there with my family in exchange for some light maintenance, basically free.
I'm wanting to buy another rental property at around the 100k price and put perhaps 5% down, so plus closing costs and some light repairs it may cost me 10k to get into another rental. I'm thinking I can get around $450/month cash flow with a 10k investment. However I don't really want to spend the majority of my cash on hand, and I may want to buy another primary residence in the next 6 months or so, (I'm not sure how long I can milk my FIL) So im thinking about doing a cash out refi. I'm thinking it would go something like this:

Get home appraised at 115k
New Loan amount 92k/3.875% interest/ 2k closing costs/ $433mo payment
So I wind up with an extra 19k on hand that would allow me to buy either 2 additional rentals or a rental and a primary residence with ~5% down each.

Sorry for the long post, I'm just trying to figure out what my next move forward will be. What would you do?
Edit: I just realized this is my first ever post. I've been a lurker for about a year. I've read just about all of the mmm articles and I'm living a much more mustachian life than I was a year ago. I realize at my age I'm behind, but not hopeless.
« Last Edit: November 30, 2014, 03:10:41 PM by Tbill »

Another Reader

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Re: Should I do a cash out refi?
« Reply #1 on: November 30, 2014, 03:15:03 PM »
Have you discussed interest rate and terms with your lender?  Rental properties require a higher rate of interest, usually one percent.  The 3.875 percent rate is current for conventional loans for owner-occupied properties.  Not sure you can do 5 percent down, either.  Rentals are typically 20-25 percent down.

Skyhigh

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Re: Should I do a cash out refi?
« Reply #2 on: November 30, 2014, 03:16:05 PM »
I would cash out refi and use the funds to buy another investment property. I like to think of my rental homes as a harvest-able commodity. We can reap the financial benefits without loosing our investment through cash out refinance. Refi and buy !

Tbill

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Re: Should I do a cash out refi?
« Reply #3 on: November 30, 2014, 03:44:43 PM »
Have you discussed interest rate and terms with your lender?  Rental properties require a higher rate of interest, usually one percent.  The 3.875 percent rate is current for conventional loans for owner-occupied properties.  Not sure you can do 5 percent down, either.  Rentals are typically 20-25 percent down.

I have not discussed it with a lender, however I have read the fairly detailed terms on my lenders website. My refi plan includes leaving 20% equity in my first rental. As far as the rate on the refi I'm not sure on what rate I would get, I was hoping that since its the only mortgage I have at this point they might allow it to be refinanced as a primary or secondary residence with the lower rate. I'm thinking worst case scenario I would wind up with the same interest rate I do now: 4.875 which does degrade the appeal of the deal, im essentially then spending 2k in closing costs to borrow 20k which doesn't seem that awesome.
On my proposed purchase I would finance it as a primary residence and live in the place for some time before renting it out, which is another issue I have wondered about. How long I would have to stay for it to qualify as legitimate. I asked a mortgage broker point blank about this once and she didn't really have a good answer for me. After some thought she just said well as long as you tell me its going to be your primary residence, it qualifies as your primary residence and you need to get your mail forwarded to the new address, utilities etc.

Another Reader

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Re: Should I do a cash out refi?
« Reply #4 on: November 30, 2014, 04:35:47 PM »
Your tax return will show the income from the rental.  Unless you can show you have moved back in, my guess is you will have to refi as a rental.  You can buy another primary residence if you keep the original one as a rental.  For Fannie Mae loans, you will have to live in the new property for a year before you apply again for another primary residence loan.

If you want to accumulate properties, buying something rentable every year or two as a primary residence and then renting it out after a year is a slow but easy way to get the first four and finance them at the most favorable rates. Between 4 and 10 gets more complicated, but it can be done.  Past 10 and you leave the conventional financing world.  Making friends with a portfolio lender in your area gets you out of the 10 loan limit, but reasonable portfolio lenders are difficult to find.

If you have a decent real estate investors' association in your area, it might pay to attend their meetings.  Other investors can point you in the right direction for financing.

notquitefrugal

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Re: Should I do a cash out refi?
« Reply #5 on: December 09, 2014, 07:56:58 PM »
IMO, you would be using too much leverage to go from one property to three properties. Even if they cash flow now, things go wrong with the house or renters or both, etc. You could really end up in trouble. If you need to buy a primary residence, I can see doing a cash out refi on the rental to help with that.

Revisit the idea of buying more rentals when you have more equity, more cash on hand, more in your 401k, and more take-home pay, all of which would provide a greater safety net.