Cash out refinance a rental to repeat?

Question

Hello all, long time reader and first time post here. I appreciate all of everyone's contributions here as it gave me the confidence to step up to the plate and recently closed on my first long-term rental.

I live in California and saved enough money to purchase (with my cash) an out of state long-term rental. The home I purchased was on a large lot and I was able to get it rented and running with a small cash flow immediately. I was happy. On the property, there was a large slab concrete foundation (approximately 700 sqft) wherein I pulled a small HELOC from my current home in CA to build that into an efficient 1/1 that I rent separately. That also rented immediately with strong cash flow.

So, in essence, I have 1 out of state mortgage which is more than covered by the first rental home which is a 2/1, and I pulled a small HELOC from my CA property to build that 2nd home on the same property.

All-in-all this property cash flows well and I am happy with it.

Now comes my question:I am interested in refinancing as I have read through the BRRRR method but have some questions on this. I would like to pull my invested cash out of this property and re-invest that into a new cash flowing rental property. Essentially, I am looking to rinse and repeat, however; I don't want to keep using a variable HELOC interest rate to do so.

1. Can I cash-out refi this rental property?

2. If I cash-out refi the property, it's value is reassessed - meaning the property value goes up and I get cash out of the deal. Does that mean my mortgage for that property goes up? The reason this is important is because I don't want to increase my rents to cover the new higher mortgage. This is the biggest question I have regarding how to make this method work.

Guys/gals, how do I work this out as I know from reading through BiggerPockets that this is doable, just trying to connect the dots. Thank you all, again, for any input here.

Kevin McCool · Answer

Thank you for the reply. I appreciate your feedback and understand the current rate situation is a little volatile. So it does sound best to hold off, especially with the triggering of higher tax and interest rates.

Randall Alan · Answer

@Kevin McCool

If the property was financed, there is usually a 6 month “seasoning” period before you can refinance it. If you are beyond that, you should be allowed to refi… BUT…

at what expense? Investment loan rates are off the charts right now (about 7% without the cash out if I had to guess, and probably add another quarter point for the luxury of pulling out cash.) but any broker can quote you the real numbers.

If you pull out more money (and keep in mind you have to leave 25% equity in the property based on the new appraisal), any increase in loan value would most certainly drive up your new loan rate - especially if your old loan is at a lower interest rate. It’s a brand new loan - paying off any other loan that is attached to the property. The new loan has to be in first position, so if your Heloc was tied to that, the Heloc lender would have to agree to subordinate the Heloc to the new cash out lender, or it would have to be paid off and closed (I’m guessing).

Also, realize that if you take out a new loan, your property appraiser will likely use the new loan value to reassess the taxes on the property… so don’t be surprised if you trigger a tax increase on yourself from your refi. The appraiser more or less sees the refi the same way they see a sale to a new party - even though it is to yourself.

It’s hard for me to imagine this working out financially beneficial with where rates are at now, but run your numbers and see what they tell you.

all the best!

Randy

Jason Wray · Answer

Kevin,

You can refinance the rental and pull out up to 80% LTV cash. You have to kind of accept or adjust to the increased mortgage amount and make it work out in the long run. There are some things you can do in the short and long term to help with increase in mortgage.

Ultimately the cash is going to allow you to buy more doors to increase your cash flow to put you into a higher passive income so it works out. Again there are things you can prep for with your Banker to set up short term lower rates and locked in long term rates using buy downs as an important feature meeting your burn rate for the LTR.

Cash out refinance a rental to repeat?

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