Cash out refi to buy more real estate.... why?

5 Replies

I hear all the time these investors who talk about buying a property, fixing it up and then pulling all the money out to buy another property.  What I can't understand, is that if you pull 80% of the equity out to buy another property, all you did was make your payment much larger and you no longer cash flow, or just barely make the expenses....   Thats how I see it.

I own several duplexes........on  two of them I have about 42% equity each.  My payment for each of these two are $1350 each including insurance and taxes.  I only pay for lawn care and mgmt fees.  Each building grosses $2700 a month / $5400 total.  I feel like if I went and refinanced to use the money for another property, then the $1700 or so dollars I am making monthly, will become a few hundred monthly dollars instead.  I understand the principal of having a lot of properties to create wealth, but if I can make $1700 a month with two properties, then refinancing to buy 2-3 more properties with minimal downpayment does not make sense to me...... there will be minimal cash flow from every property, and I'd likely be making the same $1700.....

What are some of your experiences.  The system must work, because folks do it I guess......  I'm on the fence about making this move.  I find some security in having equity in the property and not being leveraged 80/20 on a lot of properties with minimal cash flow from each.

Thanks for your responses.

Dale.

It depends what stage of investment you are at. If you are accumulating then refinance is a great way to have higher asset base to work with and more opportunities. This is a double edged sword, if things turn south it can be just as bad.

Refinance is best used in growing market, on top of that the tenant is paying off the principal, So even if your cashflow is low you are increasing your equity each time principal is paid. 

Refinancing in your situation depends upon your goals. The "dead equity" argument is that the ROI on your equity when you have a paid off property is very limited. My thought for a number of years has been to "go wide" by buying my chosen number of properties, and then "go deep" by paying them off.

Others want a certain number of doors, or a certain amount of cash flow, or a certain amount of net worth.  Real estate is a many-faceted asset, as you know.

I bought a property in 2003. Went through the same logic,,, refinanced to a 15 year in 2004 and basically got back all the invested capital. Rents were about $800/month. It's 2018 now. rents are $1200, but do the math on the mortgage. 

I have often thought the same thing as OP...long run I get it, short run, its harder for me to understand

@Dale Vance This strategy gain momentum during the rapid equity growth cycle we are now almost out of completely. In 2010 if you bought a property in CA or DC which are my markets, I could do a Cash-out at year one and have another $40K in equity 12 months later following that cash-out, The risk was mitigated by the hot markets. In todays environment the risk is no longer mitigated by those rapid equity building factors, the strategy turns investors into gamblers.

If your property still cash-flows after the cash-out, all you need to do is make sure you won't have to sell it during the next down cycle, if so, you'll have to take a loss if you sell in a slow or no equity growth market because a 75%-80% Cash-out or HELOC doesn't factor in the cost of selling the property.

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