Pay down existing rentals vs cashout refi and add leverage?

10 Replies

I have three SFH rentals at this point and am in a good spot financially. One of the rentals is fully paid for and I'm torn between simply using the cashflow from it and the other two to rapidly pay the other two off, or taking a cashout refi on the paid-for rental and using that cash to buy two or three more at 25% down on each (so they will also cashflow about 300-500/month each). Doing the latter would improve my cashflow from that paid for unit from 1000/month (for the paid for house left as is and cashflowing) to about 1250-1400/month of cashflow with the cashout refi used to leverage 3 more properties.

I intuitively understand that the refi method will in the end make more money, since I'll have increased my house numbers by 3 (from 3 to 6), adds ~450K to my portfolio in house values (each being roughly 150k) and will have renters paying down the mortgages and also covering taxes and insurance as well.  But I also understand that this increases risk, as all 6 houses still need maintenance, etc. 

Somebody help push me off this fence!

I'm in a similar boat, with slightly different numbers.

I don't have much to add other than sometimes it's good to know other people are fretting over the same decision. You're right in that leverage is the obvious better financial math, but can you handle the risk stress over that time. Maybe you could do a little of each. As you (we) gain more properties the risk goes down because of diversification. More properties means less overall vacancy. In the beginning it seems quite tricky though. 

I'm basically just inserting my worthless post in here in hopes that someone smarter will come to the rescue. 

@Paul Doherty You clearly understand the benefits of leveraging.  So it comes down to comfort level.  And that is worth considering.  It doesn't matter that you'd do better financially if anxiety would eat you alive.

@Alexander Felice had an excellent suggestion.  Maybe you could do both.  Cash out refi, Reserve perhaps more of the cash than other investors would so you have a very safe emergency fund, and invest in at least one more property so your monthly cash flow is at least the same as it is now.

I think you're both on to something with that suggestion.  I can still get the benefits of leverage without the sleepless nights and additional risk that fully leveraging the proceeds of the cashout refi would bring.  I'm definitely going to consider that approach as I think it may very well be the in-between answer I need.  Thanks to you both!

Depends on where you are in your investment life cycle- i.e. Acquisition phase, maintenance phase, disposition phase (if I'm remembering the terms for the 3 parts of the cycle correctly).

If you're early on in career and looking to increase portfolio, should cash out and buy more with relatively high leverage (while being sure to have solid cash reserves on the side of course).

If you're middle career and looking to just maintain portfolio and don't need cash flow from properties, then focusing on building equity in existing properties by using cash flow to pay down loans make sense.

Then end career dispose of assets and the sweet equity you hopefully built up by selling outright or owner carry or whatever.

I personally would cash out and buy more with leverage, but that's someone in acquisition mode bucket talking.

As an update to this thread I decided to do a cash-out refi and invest in more properties. The house that was paid off was worth 175k or so and I did a cash out refi for 90k (total was 95k with all the fees). So that house now has a mortgage back on it with a PITI is around 950 a month and rents at 1425 (1325 at the time I did the loan). I then used the tax-free 90k acquired to buy two new properties at ~150k each, putting 25% down (approx 38k) on each. So each of those are cash flowing a bit (200 or so each above PITI) and the original house that got refi'd went from cashflowing about 1000 to cashflowing 400. So 400+200+200 = 800 of cashflow. So I lost 200 a month in cashflow but turned the one cash out refi house worth 175k into three houses worth 475k. I think it's also worth noting to others considering something like this, that I still have roughly the exact same equity as I had before - the only thing lost equity-wise is the actual closing costs on the two new purchases; all that happened was part of the equity got moved from the paid-off house into the two new ones.

The cost of capital at over 5% makes me flinch a bit. As does not increasing the equity or cash flow overall. 

At these low rates it may make sense as long as each properly cash flows and you're buying right . Would like to see more equity at the buy of course. $175k rental houses don't pencil in my  market but a multi would. Just pointing out the option.

You've done well Paul to have free and clear property at all. Congrats on having options. I hope this decision works out well for you!