Trying to understand the risks involved with cash out refinancing

Orange County, California
Starting Out
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Trying to understand the risks involved with cash out refinancing

A.J. Zunino
Member since 2024 · 1 post · 1 vote

Hi community! I am a first time investor and am researching and learning as much as possible before I take the plunge. My partner and I are planning to begin on making offers starting Summer 2025. I have zeroed in on a few markets (geographically and type of renter I want to cater to). However I am struggling to understand and evaluate the risks involved with cash out refinancing 2-5 years down the line. My strategy is BRRRR.

The way I see it is: I purchase a property and rent it out to hopefully breaking even on the mortgage. The goal is to cash flow so I will rehab the property and increase the rent. My property value will appreciate from my rehab and also with the market. 

Here's where I struggle to comprehend and make it make sense: So when I go to cash out refinance, the property is appraised at a higher value from market appreciation and rehab. When I complete a cash out and refinance will the new mortgage be higher? And if so, how do I keep the property cash flowing / in the green? 

What am I missing here? If this is how a cash out refinance works, it feels like the strategy is to either have more to rent out within the property (multi-family), wait for average rents in market to increase, rehab the property more and increase rent more, pay off the property/ more of the mortgage and refinance again without a cash out to decrease the mortgage (I don't even know if I can refinance a property twice)? 

I could very well be looking at this wrong. I am reaching out the community to ask for help and advice. All thoughts, critique, and stories are welcomed and encouraged!!! Thanks.

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Caleb Brown
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
1y

Your mortgage is based on the refi when you complete the refi. So if a property is appraised for 100k your mortgage would be based off that. As far as how much you pull out it depends on terms. Typically it's 70-80% range. The more you pull out the higher the rate. If you pay cash you'll pay yourself back percentage back, if you use the a hard money loan the refi would pay that off and the difference would go to you

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  • Caleb Brown
    Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
    1y

    Your mortgage is based on the refi when you complete the refi. So if a property is appraised for 100k your mortgage would be based off that. As far as how much you pull out it depends on terms. Typically it's 70-80% range. The more you pull out the higher the rate. If you pay cash you'll pay yourself back percentage back, if you use the a hard money loan the refi would pay that off and the difference would go to you

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  • Todd AndersonPro Member
    Real Estate Agent · Cape Coral, FL · Member since 2023 · 392 posts · 175 votes
    1y

    A.J.,

    I work with investors that do this all the time.  Most of the investors I work with are looking at doing a cash out refi every 2-5 years, depending on the market.  

    So for the investors I work with, we look at New Construction In vestment property.  With this they don't have to mess with the renovation headache.  We get investor pricing on the property so that the property cashflows day one.  with normal appreciation in a growing market in 2-5 years there is enough equity to refi.  the proceeds of this refi then serve as the downpayment on another property that cashflows.  And continue the process.  You can continue to do this soon as you have enough equity to get another investment. 

    The only way the system does not work is if you take the refi money and don't het another property that cashflows.   

    Feel free to connect for a more detailed explanation.

    Best of luck.

    [email protected]651-492-5652
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  • Tim W.
    Member since 2024 · 65 posts · 62 votes
    1y

    I'm not a R/E pro, but do work in the finance world. I think one of the biggest risks you face with Cash Out is interest rate risk.

    It's really difficult to predict where interest rates will be in a 2-5 year time period, so it can also be challenging to model out future mortgage rates. While the Fed looks to continue their trajectory of cutting short term rates, I suspect the mid and long points of the yield curve (particularly the 10 year, which is what most mortgages go off of) will stay elevated. 10 Yr treasury today is 4.4%, but if it goes up to 5% or 6%, your mortgage will likely be in the 8% or higher level, which then hits CF even more.  

    It's really hard to predict where rates go from here. We're likely in decent shape the next year or so, but in my mind, inflation will be key to watch. higher inflation will mean higher rates- may be good for property values if the overall economy stays strong, but inflation will likely raise interest rates. 

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