Is there a better way to go about this? Here's what we are planning to FINALLY become real estate investors:
1) Cash out Refi on our current home
2) Rent out our current home
3) Use the cash out to buy a new home to live in.
4) Do it again
Does this make sense? For reference, we are in our early 40s. Main goal is to have something for retirement, not really interested in passive income right now.
Please feel free to poke holes in our plan or suggest better ways to accumulate at least 3 properties by the time we retire in 20 years.
First question to ask is whether your current home will make a good rental after you do the cash out refinance? If not, you’ll need to formulate a new plan.
Are you basically saying your plan is not to concern yourself with cash flow now with the assumption that you just want paid off houses come retirement age?
Another thing to consider is your closing costs of doing a cash out refi and making sure that you would receive enough cash for the down payment on another property.
I'm assuming you will but just something to keep in mind.
@Wendy Quezada I'm currently in the middle of doing exactly what your doing but instead of a cash out refi I'm going to do a rate&term refi and then a 80-90% LTV HELOC. Reason being is that I get better terms on a rate&term refi instead of the cash out and a HELOC you only pay intrest on what you use and when you use it. Good luck.
A third thing to consider. If you live in the one city in the country that hasn't seen any appreciation, fine. But if the house is up $100k or more since you purchased it. You're gong from tax free to taxed. ($15k per $100k in appreciation is going to take a while for that rental profit to just cover the tax expense you created.)
Just because you already own that home is no reason to convert it to a rental. If you think the 80% refi can buy another property in cash. That means you could sell, tax free, and buy one rental for cash and get a 20% down loan on a new primary, probably with better terms. Or better yet, put 25% down on both and you have 3x as much cash laying around in reserves. If my math is right (New properties are worth 80% as much as existing property.) you could actually buy 3 properties with 25% down (60% of original value combined) and still have twice your original plan's equity in cash.
John, make sure your heloc is fixed rate and how long its good for. It used to be they were all variable and started getting called in 10 years. I know there are more options now, but just a thing to know as far as rising costs and eventually rising payments. There's obviously going to be some cure for the bank so you cant borrow 3% money 20 years from now.
@Mason Hickman - We'd be able to rent our current home and not cash flow. By which I mean we'd bring enough in for maintenance and vacancy reserve funds and property management fees, but not have anything left over.
Yes, exactly right, we'd like to have 3 properties paid off when we retire in 20 years.
@Bill Brandt - That is a very good point about the taxes. I'll think about this option instead (selling, using the proceeds for at least one rental plus a new primary). Thanks so much for this food for thought.
@John C Peraza Interesting options. Let me look into what the rates would be with both options. I'll look into a Heloc as well. Thanks!
@Wendy Quezada I'm a huge proponent of a very specialized 1st position Line of Credit that's tied to a zero balance sweep checking account. The sweep account allows all of your regular checking deposits and idle funds to sit on your remaining balance, saving interest cost.
Unlike a cash-out ReFi, you aren't locking yourself into 30 years of higher payments on day 1. You only pay for the access to equity when you need it. It's all about making your money and your loan work for you, not the bank. This style of loan has been around overseas for decades, but it's a little newer to the states. My wife and I ReFi'd into it, setting our max credit line at these high values. When the market turns, we'll simply write a check out of our line to purchase our next property.
I always recommend everyone educate themselves on it as an option!