Cash out refi to buy first investment?

Question

My wife and I are about to do a cash out refinance on our primary residence and get around 80-85k in cash to put towards a short term rental investment property. It will increase our personal residence mortgage payments by about 350-400/month, so that means we need to at least clear that on top of our vacation rental STR mortgage. For anyone in the STR market/game, if we have a property is it pretty typical to be able to clear more than 400/month on your STR after all expenses? We’re looking in TX and thinking San Antonio. We’re probably only going to use 40-50 of the 80k right away and use the rest to hopefully get a second property a year or so later.

Jim K. · Answer

Hi Tanner,

Assuming you have deal flow, doing a cash out refi can make a lot of sense as you're getting incredibly low rates on a 30 year fixed. It will lower your blended interest rate for your STR investment.

If you're borrowing at fixed 3-4% interest and buying a 7-10% CAP deal, that leaves a lot of room for cashflow. If an STR only produces $300-400/mo in cashflow, I would run.

Douglas Fox · Answer

Hi Tanner,   My wife and I recently entered "the STR market/game."   Yes, I think it is pretty typical to be able to clear more than $400/month on your STR after all expenses.  Maybe you can even clear $4,000 per month!  Our situation was that we had a Long term rental that we converted into a Short Term Rental and we had heard that you might be able to earn 2x or 3x the income by making the change over to a Short Term Rental.  Based on that, we bit the bullet and invested a tidy sum to purchase furnishings and to make some serious renovations to the rental house.  Things like renovating the kitchen and bathroom and having the chimney flu repaired, refinishing the hardwood floors, painting everything, etc.    Maybe this is somewhat pandemic related, but the response has been way, way, way beyond all our expectations -- like zero vacancies on each and every weekend since we went live about 6 months ago.  We have been easily able to achieve those 2x and 3x increases in monthly income.  We can now see why SRT's can be compared to money machines.  I think everybody could use a few extra money machines in their life.  I don't think you will regret this strategy that you have laid out.

Michael Tappert · Answer

Good Morning!

Its all about running the numbers.  Using the calculators on the site, and going through local AirBnb or other short term rental sites in your areas to see what average rents look like.  I think you can do a free trial at https://www.biggerpockets.com/... if you click through to the sponsored page.  That will help you target what TYPE (size, location, layout) of STR properties you should target to make sure you can float the STR Mortgage PLUS the $400 you want to cover your cashout costs.  Remember to also consider appreciation, and equity buydown as you use that rental income to pay down your mortgages every month.

Cheers!

Cash out refi to buy first investment?

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