Cash-out refinance on primary residence?

Question

My wife and I are trying to get started with rental properties, but only have a little bit of capital. A lender we contacted suggested that we do a cash out refinance on our home. He said a HELOC would end up costing much more. For us to start out, should we do a cash out refinance on our primary residence and use the capital to brrrr strategy for a fixer upper...or possibly use the cash to make down payments on multiple rental properties?

Carlos Ptriawan · Answer

basic rules:leverage when inflation is low and interest-rate is low.deleverage when inflation is high and interest rate is high.Either HELOC or cash-out refi is a sort of leverage, when you HELOC/cash-out refi during interest rate > inflation and then do BRRR ; your risk is pretty much is 3x compare to an investor that's over-leveraging during low-interest rate/low inflation period. Be careful since it's your own money.

Dyami Pike · Answer

that is 80% of the equity. you can only borrow against what you own, otherwise the bank is double lending you money for the same asset. but thats still $140k in cash. which would be an amazing amount for a self financed brrrr, or downpayments on brrrr loans for multiple brrrrs, or you could purchase 3 $200k MFH with 20% down and have 6 doors right off the bat. lots of choices.

Henry Clark · Answer

Move into the BRRRR.   Live there for two Years.

Have you lived in your primary house for two consecutive years out of 5?  Or keep living there till you have lived there two years. Sell your first primary house before the end of 5 years

Why?  No taxes on the gains in your house.

In your BRRRR live there two years also as your primary house then sell it with your gains.

Run  the numbers.

You want to start your snowball and build up capital.

Compare your returns versus a MFH versus the above.

You can only do this so much until you have to scale by either buying a bigger BRRRR or going into MFH

But you can get your snowball of capital started      Good luck

Ash Hegde · Answer

One of the factors would be your mortgage balance and rate. If you have a large balance at a low rate, a HELOC is likely a better option since you'll only be paying interest on what you draw.

As for strategy, if you have enough in the HELOC (or cash after a refi) to buy and rehab properties outright so you can BRRRR, that will let you grow the fastest since you will be able to recycle that money over and over.

Daniel Tanasa · Answer

It depends how much you still owe on the house, what’s the interest rate and how much is your equity in it. HELOC can be a better option sometimes, but you need to give more information to figure what’s best for you

Daniel Tanasa · Answer

In this scenario I think your bank is probably right. You have quite a bit of equity in the house and since you're not looking to use that capital for a short period of time and put it back, probably the Refinance is a better option, 6% is a pretty good rate at this market if you can get that, also you always have the option to buy it down. The 80% is out of the full value of the house. So you'll be able to get a loan for about 360k and have about 80k cash at closing after you pay the closing costs.

Eliott Elias · Answer

Rates are high right now, if you cash out refi you will be obligated to pay that for 30 years. If you HELOC you can take out as much as you need, but you need a game plan to pay it off monthly

Bud Gaffney · Answer

Absolutely. How much cash can you get? Let's go!

Zach Wain · Answer

@Ryan Fox - make sure you know what the closing costs are for the 6.5% rate.  $0 in closing costs or $15k in closing costs makes a big difference.  Rate is 1 half of the equation, closing costs are the other half!

Bill Schrimpf · Answer

I'm really glad your lender talked to you about DTI ratio.  Reading between the lines, it appears that is your limiting factor.  Looking forward, it's important to know that rental income will not be considered by my most lenders until you have two tax returns with rental income.

Quickly running the numbers, you currently pay about $1275 (PI) for a place to live.  Cashout out refi at $360,000 (80% LTV) puts your payment around $2275 and proceeds of $85,000 (minus closing costs so really +-$82,000).   If DTI is your limiting factor, you will struggle to get another mortgage for an investment property, regardless of cashout refi or heloc.  What do your numbers look like if you heloc just enough for a down payment and get a new mortgage on the investment?

The advantage to a HELOC is that you can potentially pay that down and get back to having a home to live in (and tap equity again) for $1275.  That 3.75 rate is worth $1000 every month in this scenario.

Ask your lender how much they make on a HELOC vs. a refi.

In my market, sellers are now offering incentives such as buying down rates.  Ask for that wherever you're buying!

Cash-out refinance on primary residence?

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