How do you guys think about taking cash back from a paid off rental property to buy another rental property?

6 Replies

Any pros/cons of taking cash back from a paid off property to buy another rental property?

It's a beautiful thing because you can leverage at a usually low rate from a heloc or a cash out refi...your payments also usually don't go considerably up unless you are taking out a considerable amount. And the best thing for me is, when you take out cash from Equity you are theoretically acheiving larger cash on cash returns. Think about the down payment you did if you financed it, 20k for example. If you took that 20k back then you are getting a 100% cash on cash return. You basically financed that place with 0 down because you got all your money back and more if you take more out. Further more I will definitely do it if I can achieve a $300-500 cash flow while only raising my payments on my house by not much.

It makes a lot of sense. It's a good way to build a portfolio.

this is generally a good idea. The only thing I would be wary of is the refi cost. It can eat up your equity REALLY fast on a low value property.

Otherwise I'd look at the refi just like any other rental property valuation.

cons

$ refi cost

$ highly leveraged

$ potential reduced cash flow short term

Pros

$ more properties for less cash

$ higher cash flow potential long term

It depends on what your crystal ball tells you the economy is going to do. The massive deficit spending is going to hit hard in the next few years. In theory, if you see inflation you should borrow now and pay back in cheaper dollars. But what if rent control ties you to lower increases than inflation? What about vacancies while highly leveraged?

What will happen if we go into a recession, and paying renters are hard to find?

Basically, it depends on your willingness and ability to accept risk. The more risk (higher leverage) the more potential gain, or loss. This issue creates a balancing act for all of us in deciding what is the best course of action. Myself, I am looking to retire soon so I approach it more conservatively than I would have 20 years ago.

Whatever direction you take, make sure you leave lots of cash reserve to cover that huge unexpected expense that will hit at some point.

that is what you are supposed to do. This is using the money of the business to build the business.

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