Should I cash out refi ?

Question

Kind of new to REI. My wife and I bought a condo in 2015 in Farmington, CT with the intention of living in it. About a year later I joined the Navy and we moved out to California so we rented out to a school friend of my wife's, essentially stumbling into a rental property. Once she moved out a couple years later, we hired a property manager and they have been great.

We purchased the condo for 92,000 and it has 69,000 left on it. Looking at online calculators, a rough value of it is currently 155,000. We don't have much cash on hand now to invest in another property and it would be a few years before we were able to save enough for a down payment. We thought about doing a cash out refinance which would give us roughly 40,000 after closing costs. We would use 5-10 for some repairs in the condo we are currently living in and then rent it out and house hack another condo with a VA loan. Then with the remaining cash, we have a partner who would go in on a multi-family with us. The big drawback is that the interest rate on the Farmington condo would go way up with the refinance. Rough estimate is with the new loan it would break even cash flow wise for now. Is it worth it for the interest rate to go significantly up to get the funds to help fix up current condo to rent it out, house hack another home and purchase a multi-family home?

Thank you

Justin Arcelaschi · Answer

Thanks! Yes, we did include maintenance reserves and vacancy. We've been able to save a decent reserve for that property because (luckily) in the 8 years we have rented it out we haven't had a single gap in vacancy (knock on wood that continues).

Adam Bartomeo · Answer

I hear all the time about interest rates but that is not a factor in this equation. The factors that you should be focused on is cash flow and appreciation. Will the properties cash flow and will they appreciate. If yes than refi and buy another property.

Anderson S. · Answer

First off, kudos on stumbling into your first rental property - that's how many investors get their start! As others have noted you could leverage your VA privileges to give you the best chance to purchase a property with low funds outright. Now, let's break down your options:

Cash-out refinance: This could be a solid strategy to unlock the equity you've built. The $40,000 you'd get could definitely open up some opportunities. However, the increased interest rate is a significant consideration.

Breaking even on the Farmington condo: While not ideal, remember that you're still building equity as the tenants pay down your mortgage. Plus, if the area continues to appreciate, you're winning in the long run.

Using the funds:

Improving your current condo to rent it out is smart. It could increase your rental income potential.

House hacking with a VA loan is an excellent way to get into another property with minimal upfront costs.

Partnering on a multi-family could be a great step into larger investments.

Here's our take: If you're committed to expanding your real estate portfolio, this could be a solid move. Yes, your cash flow on the Farmington property will take a hit, but you're leveraging that equity to potentially acquire two more properties. That's significant growth.

However, consider these points:

Make sure you have reserves for unexpected repairs or vacancies across all properties - THIS IS KEY

Run the numbers carefully on the potential house hack and multi-family to ensure they make financial sense.

Consider the long-term strategy: Will the potential appreciation and equity build-up in the new properties outweigh the increased costs on the Farmington condo?

If the numbers work out and you're comfortable with the risk, this could be a powerful way to scale your portfolio. Just make sure you're not stretching yourself too thin.

Remember, at Brooklyn Funding Group, we specialize in creative financing solutions for investors like yourself. If you want to explore other options that might help you achieve your goals without significantly increasing the rate on your Farmington property, we'd be happy to discuss some alternatives.

Real estate investing is about calculated risks. If you've done your due diligence and the potential rewards outweigh the risks, it might be worth taking the leap. Good luck with your decision!

Nathan Gesner · Answer

Your equity is not a savings account from which you can withdraw whatever you want. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEYou cash out $100,000 of your equity and use this as a downpayment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage).

Key Numbers

• Home Equity Loan Interest Rate: 6%
• Mortgage Interest Rate: 7%
• Rental Income: $3,000 per month
• Expenses (management, taxes, insurance, maintenance): $800 per month

Income and Expenses

• Monthly Rental Income: $3,000
• Monthly Expenses: $800
• Monthly Mortgage Payment: $2,000

Explanation

• The investor earns $3,000 in rent each month.
• They pay $2,000 on the investment property mortgage and $800 on other expenses.
• This leaves $200 profit each month or $2,400 per year.
• However, you have to pay $6,000 interest on the equity borrowed.
• This leaves you with an annual loss of $3,600.

This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.

Alecia Loveless · Answer

@Justin Arcelaschi Keep analyzing deals everyday and eventually a 2-4 unit will come available in a market you’re willing to live in. I would not recommend buying any property you wouldn’t feel comfortable living in. From either a safety standpoint or because the property couldn’t meet my standards of being a nice place to live (not a slum property).

I’m sure many investors would I’ll disagree with me on this criteria but I want to be proud of my rentals and know that they’re safe and nice for my tenants.

Justin Arcelaschi · Answer

We purchased current condo 2 years ago, so not a lot of equity in it yet.

Justin Arcelaschi · Answer

We had thought about moving into a 2-4 family property and using the VA loan for that. We certainly aren't opposed to it. Most of the multi-family properties aren't in the best neighborhoods where we live, not slums either. But not neighborhoods I would want to move into with a 2 year old. If one popped up in a nicer area, we would do it for sure.

Justin Arcelaschi · Answer

Thank you. I was leaning more toward the refi. That is a good point that we can refi again if and when rates come down. And we will raise rent over time as well.

Ash Hegde · Answer

From the opportunities that this will present, the refi is probably a good idea. The interest rate increase will hurt less since the loan balance won't be extremely high in this case. When you say break even, are you accounting for maintenance reserves and vacancy? If so, it seems like a good move.

Michael Smythe · Answer

Why wouldn't you use your VA loan to buy a 2-4 family property? You could live in one unit, rent out the others.

You might be able to get a HELOC for up to 65% of your CT condo.

How much equity do you have in your current primary condo?It's easier to get a HELOC on a primary!

Should I cash out refi ?

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