Need Cash Out Refi Advice.

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Need Cash Out Refi Advice.

Bruce Knauff
Member since 2020 · 11 posts · 5 votes

Hey all longtime forum reader/podcast watcher new poster here. Last July I finally took the plunge into real estate investing and purchased a SFR in need of some TLC but nothing too major. I lived in it for 6 months which was part of the terms of the grant I got towards the down payment.

Now I have moved out and I am finally renting the property out. Which is great keep in mind where I live houses are very cheap compared to some of the markets I know you guys are in. Here are some of the basic numbers involved. 

I bought the house using a conventional, fixed 20% down 15 yr mortgage for 36k. Since purchase I have improved the property and brought the property value up to somewhere around 60-70k. Caveat here is I haven't had the property appraised I am basing that off the proximity to the local college and other houses selling in the area. (my friend just sold a house a block farther away from campus and several hundred sq. ft. less in worse shape for 60k.) I owe 28k on the house still and would like to refinance, get my cash back out for another deal (20k would replace my costs on the deal), and maybe try to get into a 30 yr to help improve cashflow. My question is what are your guys and gals recommendations or comments on what the best vehicle to get this done is?

Side note: The house is renting at 900 per month currently and taxes, ins, mortgage is 377 per month. I also pay water, sewer, trash usually around 60-65 per month. I feel like I have done pretty well up to this point but am hoping to hear more experienced thoughts on the best way forward.

Thanks,

Bruce

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    5y

    @Bruce Knauff Dude you owe $28K on a property that rents for $900? That's a home run unless it has tons of deferred maintenance. There's only two types of investors, leveraged and unleveraged. I don't know your 9-5 job but I'd make a goal to pay the property off ASAP. That's such a low amount of debt. Why aren't the tenants paying for utilities? 

    If you choose the other route start calling lenders today. Interest rates are so low. Take advantage of a cash-out ReFi if you plan to hold it for a long time. Surprised you found a lender to loan on it in the first place, but you have a cash-flowing asset now. Good luck man! 

    0Reply
  • Bruce Knauff
    OP
    Member since 2020 · 11 posts · 5 votes
    5y

    @Jaron Walling Thanks! The tenants pay all the utilities except the water, sewer, and trash because the city pretty much forces landlords to cover those utilities. I realize that it is a low amount of debt but keep in mind I live in a VERY rural and poor area. I make good money for around here at my 9-5 but it wouldn't be anything to write home about in a bigger city. I understand your point about paying it off quickly, I thought about that too. However it would take me quite a while to save up the cash required for another down payment. I just figured trying to cash out refi would help me scale faster. Any thoughts?

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  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    5y

    @Bruce Knauff Cheers to you for investing in a rural community. I grew up in a small town of about 15,000 and I can't imagine investing there at least at this moment in my life. Where I grew up it's heavily influenced by manufacturing. It's a boom and bust economy and I witnessed the highs and lows because my worked at GM. 

    If you're serious about buying another property and your rental is stable I would consider the refinance. Maybe you can pull a 60-65% LTV to protect some equity. I would NOT OVER LEVERAGE at this time in the market. Prices are sky high across the country. I think some bidding war buyers are going to be underwater if the market slides. Don't get caught up in that buying mindset and you'll be alright. I would quietly buy some distressed homes (on/off market), provide good quality rentals, and fly under the radar.

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  • Bruce Knauff
    OP
    Member since 2020 · 11 posts · 5 votes
    5y

    @Jaron Walling That is exactly what I was thinking I am afraid of pulling out more than I need to get my initial investment back out. I also don't want to pull so much out it hurts the cashflow. I like homes that need a little help, even around here though like you said prices are following the countries trend and are rising fast. The town I am investing in is a college town so there is a pretty stable market as long as you are within 5 minutes of the college. Sounds like I need to do some more driving for dollars.

    1Reply
  • Account Closed
    Property Manager · Boston, MA · Member since 2014 · 194 posts · 73 votes
    5y

    Well congrats Bruce on your first start. Most don’t end up as successful as you. Now the question should be I did a one family home what about a two family or three family or 4 family. Start thinking bigger and if that scares you start thinking creatively how can you acquire single family property and flip them or wholesale them. I’m not a single family guy never been never will be. But the goal should be to leverage your equity to maximize your return. Also the rule is if your not living for free then make sure you do what it takes too. Keep it up. And make money. 

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  • Jon KellyPro Member
    Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
    5y

    @Bruce Knauff just like @Jaron Walling said, there are two types of investors, leveraged or unleveraged. It's really up to you and your risk tolerance. 

    I'm a big fan of using leverage to build a portfolio as long as you are buying smart. I like to compare my potential cash-on-cash return with the interest rates. If your current mortgage is 4.5%, do you think you can find other properties that earn higher than 4.5%? Of course you can and you've already proven it. 

    I'd call as many local (small/regional) lenders as possible and let them know you'd like a cash out refi. I'd ask for 75-80% LTV, so you can pull out $20-25k. I'd look for a 30yr residential loan and lock in a low interest rate. Start with your current lender because they may be willing to waive some closing costs since you already have a loan with them.

    Then, go purchase another $60k property that rents for $900/mo and you'll be off to a great start! 

    0Reply
  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    5y

    @Bruce Knauff

    Right now you're in a pretty good position because you have ~458.00 in CF left over but you haven't mentioned how much of that is set aside for repairs/cap-ex/vacancy. Based on your numbers it should probably be ~182.50/month set aside for those items. So you're left with 275.50 in net CF. If you cash out @ 75% LTV (assuming it's worth 70,000) then you're looking at losing another 127.00 per month for the higher mortgage. I think that's too low of CF. I would keep it like it is or sell if you need the cash more than the income.

    If you can sell for 70,000 then after paying realtor fees, prorated taxes for the year, closing and home warranty you should be left with ~65,000 (you should already have a valid survey).  That would leave you with 29,000 cash to seller at closing, leaving you with 20,000 after paying yourself back the initial down payment.  That's 5 years of cashflow after taking into consideration long term capital gains:

    If you finish out the lease, you'll be past the year and 1 day for a long term capital gain.

    If these number hold true then you're looking at nearly 3x'ing your money in a year and a half.  That's not even including the 3306.00 you'll make over the year in rents, and the repair/cap-ex and vacancy funds you'll get to take back if you don't have any big unexpected issues until the sell.

    Just my .02

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  • Bruce Knauff
    OP
    Member since 2020 · 11 posts · 5 votes
    5y

    @Account Closed I was actually considering a duplex but it sold before I could finish the refi process I am looking into purchasing something with more doors, the inventory for such properties in my area is scarce and I would have to look at a bigger city several hours away where property is much more expensive. Or wait for another to come on the market here. I am still not against it I would just have to think creatively like you said to make a deal like that happen. 

    @Jon Kelly I believe that what you're describing would be more easily achievable in my area. My question is for both scenarios how would I go about pulling the equity back out for a third property? Would it work the same as the first buy something with some TLC needed and force the equity I would need to pull it back out for a third?

    Thanks all!

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  • Jon KellyPro Member
    Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
    5y

    @Bruce Knauff that's exactly right. You use the same approach. Buy something for $30k, put $10k in rehab and pull-out 75% of the appraised value. Assuming it appraises for $60k, you can pull out $45k. It's what most people on BiggerPockets refer to as the "BRRRR" method.

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  • Bruce Knauff
    OP
    Member since 2020 · 11 posts · 5 votes
    5y

    @Justin Fox Thank you for the response that is also something I will definitely take into consideration, I had budgeted roughly the same number you mentioned for repairs/capex/vacancy. Do you have to cash out at 75% or 80% LTV? I was thinking honestly of only trying to get about 20k back out to replace what I had initially put in. That would help protect some of the cashflow. That was a really good point I will have to think about.

    0Reply
  • Bruce Knauff
    OP
    Member since 2020 · 11 posts · 5 votes
    5y

    @Jon Kelly Thanks for the reply when I started out I intended to go down the BRRRR route. I have called several local banks (I still have more to call just have been at work and not been able to call all of them yet) but the several I have talked to so far have offered me a variation of 20 yr fixed for 5 years then adjusts every 5 years or 20 yr fixed for 5 years and then can adjust up or down every year for the term of the loan. This kind of scares me, is this a typical kind of loan you guys see or use?

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  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    5y

    @Bruce Knauff No, you don't have to do the full 75% for Cash Out Refinances. I know a few lenders have told me that they don't lend under a certain amount. One was 50,000 and another was 70,000. If that's the case then to get around that you might could just get a HELOC and only use the 20,000.00 during the draw period (Or however much to keep your CF to your liking [200.00+ for example]). You'd have to investigate that more though as I've never used a HELOC, only Cash Out Refinances. For example, there could be lower origination fees for HELOC and might not require title work versus a Cash Out Refinance.

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  • Jon KellyPro Member
    Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
    5y

    @Bruce Knauff You should call at least 10 lenders in your area. Specifically ask if they have experience with real estate investors. 

    A fixed mortgage is preferred. You can try to get 15yr, 20yr, 25yr or 30yr. I'd suggest the longest term possible. 

    Variable mortgage, like you are describing, isn't a bad option either. You may not believe it now, but 5 years is a long time. You'll probably refinance or sell over the next 5 years anyway. Also, most lenders have caps on the amount they can increase their variable interest rates by. For example, if you have a 3.5% 20yr, adjustable after 5 years, they may only increase by .25% or .5%. 3.75-4% is still a great interest rate. 

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