Leverage through cash-out refi at higher interest rate. Is it worth it?

6 Replies

Hi BP community, my wife and I are debating whether we should cash-out refi our rental property to acquire more properties for our portfolio. However, we bought the rental house 2 years ago at 3.2% interest rate, 30yr fixed, and now has a FMV=$320K, Equity=$120K. According to the bank, HELOC is not possible on a Rental Property so we're left with one choice which is to do a cash-out refi at 4.5%, 30yr fixed. Is it worth pursuing it and lose the lower rate it's siting right now? What would you guys do? Any other way to approach this? Any advice is greatly appreciated. Thanks in advance.

A HELOC is possible.. TD bank, Wells Fargo, PENFED, NFCU, etc.

@Rey Orinion

I think it highly depends on your situation.

1) The most important question is can you and are you willing to find investments at higher returns. So if you can find investments that earn 10% or 12% (which is definitely out there) then as long as you can earn more than 4.5% you should do it. 

Now if were are a robot we could stop there but:

2) psychologically and financially can you handle paying out cash (and a lot of it based no that valuation) when something goes wrong (vacancy, required repair, capex, etc.) rather than getting checks? This is even more true if the property does not support the leverage leaving you writing checks and not getting them. Even though you can fund it many people are not ok with writing checks on a property even if it is going up. 

3) Lastly will you or should you sell it? If you are going to sell it in the next few months obviously the cost of a refi means it might be better to just sell. 

Thanks @Wilson Churchill

I will call other financial institutions tomorrow for sure.

@Charles Worth ,

1)Yes, the 2 properties we have under contract will be cashflowing more than 20%.  

2) Yes, 6 months reserves are in place.

3) No, we are not selling it--don't want to kill the goose.  The GFE still shows $600-$700 per month cashflow after the cash-out refi.

I guess, you answered our dilemma. 

Thank you sir!  Really appreciate the input you guys.

It would be safe to refi as long as you are still cashflowing a couple hundred a month (assuming 50% expenses).  We have had a good run up in this market so far... might it be time to sell and take your profits and run.

Rey,

As Wilson said above, there are lenders that will give you a HELOC on your investment property. However, they will likely cap you out at 70% -75% LTV. That's about $24k-$40k in equity that you can tab. I like the HELOC option hands down because you don't have to pay any fees upfront.

With a cash-out refi, more than likely you can get 75% LTV. However, I wouldn't do it if it were me. The price to pay is way too steep. If my math is correct, you're paying 11% interest to access $40k of equity.

1.3% delta in interest rate on $200k = $2,600/year in interest payment plus 4.5% on $40k cash-out = $1,800/year totaling $4,400/year in additional interest payment. I haven't even included a one time transaction fee for your cash-out refinance, which could be anywhere between $2,500-$3,000.

Just throw my 2 cents out there so take it with a grain of salt. 

Good luck. 

Wow! I got more information and tips than I needed.  Thank you so much fellow BPers, Lane K.  @Minh Le

Now that you laid out the pros and cons, we don't feel like being shut in the dark anymore in this issue and makes life a lot easier for both of us.  I and my wife will decide from here.  Thank you.

Sincerely,
--rey

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