Cash out refinance vs selling stocks

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Cash out refinance vs selling stocks

Raj P.Pro Member
Investor · CA · Member since 2019 · 15 posts · 5 votes

Hi BPers,

In a dilemma now and thought of posting it here to see if others are went through the same path. My goal is to invest in an investment property (Currently narrowing down the area). For the DP, I have options to either sell my stocks or do a cash-out refinance my other investment property (especially with current rate).

Provided I get the same amount by either way, what would be a wise decision in long run?

TIA

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John B ClarkPro Member
Waltham, MA · Member since 2021 · 38 posts · 26 votes
5y

@Raj P.

I’m new to real estate investing, but not new to budgeting and finance. My wife and I had a fairly similar dilemma. In the end, we looked at the interest we’d be paying on taking on more debt (we are very debt averse) versus the interest our investment advisors are getting us in the market.

We were able to cash out refi for 2.75% whereas our investments have consistently averaged 8% returns. For us, the math makes sense to take on the debt from a cash out refi and continue to build wealth in the stock market, while simultaneously using our existing asset (our house) to gain wealth in a different way (REI).

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  • Dan Portka
    Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes
    5y

    @Raj P.with a cash out refinance you'd be taking on more debt. so i guess the question is, would you rather have more debt or less debt?

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  • Raj P.Pro Member
    OP
    Investor · CA · Member since 2019 · 15 posts · 5 votes
    5y

    Hi @Dan Portka, yes, that's something I am trying to understand. Will it makes sense to take out cash with low rates to invest in an investment property (with increase in my overall debt)? The monthly CF with current investment property will not change (but for longer term + more debt). Will leveraging the extra cash out for another investment property (with decent CF) help in longer run?

    i am debt-averse but the first investment property triggered the question of if actually debt makes sense (obviously with a reasonable and conservative level). At what point or what equation, should one determine 'no more debts'?

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  • Justin Phillips
    Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes
    5y

    @Raj P. The opportunity cost for trapped equity is much lower than the opportunity cost for money working for you in the market. To @Dan Portka 's point, a cash-out would be bringing on more debt. I wouldn't recommend cash-out unless you find a true can't-miss deal. 
    My wife and I elected to ReFi into a very specialized 1st position Heloc that's tied to a zero balance sweep checking account. We have access to 80% of our equity, but will only pay for it when we need it, rather than locking in 30 years of higher payments on day one. In the meantime that sweep checking account is allowing all of our normal banking deposits and idle funds to sit on our outstanding balance, saving us a ton in interest cost. It's been a great tool for us, maximizing both cashflow and flexibility. 

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  • Eric Veronica
    Lender · Cleveland, OH · Member since 2011 · 588 posts · 439 votes
    5y

    If you do a cash out refinance you will likely incur a few thousand dollars in closing costs with the possibility of a lower/higher rate.  If you are selling stocks then it is very likely that you will incur some amount of short or long term capital gain tax.  

    This is really an impossible question to answer without accurate. Two different people asking the same exact question could have opposite answers. What is your current mortgage rate vs new rate?  What are the closing costs? What tax bracket are you in?  How much have the stocks appreciated since you purchased?  Will you pay short term or long term cap gains tax. 

    Your tax preparer/accountant is probably the best person for this type of question.

    Good Luck! 


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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Raj P.

    Are the stocks that you plan to sell appreciated? If yes, you have to factor in the tax consequences of a sale. Your thoughts on the stock/stock market also influence whether you want to sell the stock or not.
    I.E. I would be willing to sell a stock that I think will go down in the future over a stock that I still think can go up.
    I would be willing to sell a stock if the gain is long-term over short-term

    The refinance - Are you able to pull out a sizable amount where the fees make sense?
    I.E. doing a refinance where you pull out $100,000 and pay $2,000 in fees makes more sense than pulling out $20,000 and paying a $2,000 fee.

    Best of luck!

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  • Raj P.Pro Member
    OP
    Investor · CA · Member since 2019 · 15 posts · 5 votes
    5y

    Thanks, @Justin Phillips for the insights.

    Hi @Eric Veronica, Yes. i agree on the perspectives. Thank you.

    @Basit Siddiqi In my case, I am getting lower mortgage rate on investment property-1 (IP-1) + same monthly payment as before + higher closing cost (which is added to my loan and evens out if i hold it for atleast 8 years). I am anyway planning to keep this for 10+ years as it is an equity builder. So, I am more inclined towards this approach than selling stocks. My thought process was that I am getting cash-out while still maintaining same monthly mortgage payment as well as no out of pocket money on this investment property. Do you think I am missing out anything here?

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  • John B ClarkPro Member
    Waltham, MA · Member since 2021 · 38 posts · 26 votes
    5y

    @Raj P.

    I’m new to real estate investing, but not new to budgeting and finance. My wife and I had a fairly similar dilemma. In the end, we looked at the interest we’d be paying on taking on more debt (we are very debt averse) versus the interest our investment advisors are getting us in the market.

    We were able to cash out refi for 2.75% whereas our investments have consistently averaged 8% returns. For us, the math makes sense to take on the debt from a cash out refi and continue to build wealth in the stock market, while simultaneously using our existing asset (our house) to gain wealth in a different way (REI).

    1Reply
  • Raj P.Pro Member
    OP
    Investor · CA · Member since 2019 · 15 posts · 5 votes
    5y

    Hi @John B Clark Thanks for the input. Looks like I am in the same situation as yours. I m also leaning towards getting cash out while maintaining same monthly mortgage payment (+ the same monthly CF) while keeping my stocks for growth. I just wanted to find if my thinking here makes sense or if i am missing anything long-term. In my case, i am planning to keep both my investmest properties + stocks for long-term hold.

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