Cash out Refi and wait
Redondo Beach, CA · Member since 2014 · 30 posts · 4 votes
Hi I am looking for opinions on the following strategy. I have a 4 unit property in LA area worth about $1mil with $500k equity. It nets $1500/month after debt service. I am considering pulling $200k out for investment in a new property.
However, unless I find an outstanding deal I am most likely going to keep the cash on the sidelines for 6m to 2yr waiting for some correction in pricing. I will keep the cash in stable low risk investments and some blue chip high dividend stocks in an attempt to tread water until I invest the funds.
The cash out refi is at 4.6%; the existing loan is 4.3%. I don't want to wait until investment time for the cash out refi because I believe interest rates will be considerably higher. Basically, I am trying to lock up a loan at today's rates with anticipation of higher rates and lower prices in the near future.
Thoughts?
As I look at your numbers, I see that you are in a 1M property, but only getting 1500/month in CF. Ouch!!
Then, I look at having 500k in equity, as in your money, with a return of only 1500/month. Ouch again!!!
Now, when I look at this a third time, at the potential with the 200k from a refi, and the struggles you are going to have in the market of choice to put those funds into action, I see a reduced CF while your refi funds are taken, but sitting on the sidelines...you're better off leaving it in the property until it would have somewhere to go...your next investment...see @Mike Hanneman
Me, I would take the money and run, to a different market, where your money (equity = $500k), could get you a lot more than just $1500/month. Maybe that's because I'm familiar with other markets where $100k would get you that same $1500/month, so I'm seeing the potential for $7500/month in those markets.
@Zachary Freeman, unless you put the $200k to work immediately, earning (significantly) greater than 4.6%, then your 4plex will cease to cash flow.
If your $200k is going to just be a 20% deposit on another $1m property, won't you want to lock in the lower (per your prediction) borrowing costs for THAT property too?
But, who says that buying price will be lower as soon as interest rate rises?
One argument suggests that interest rate will increase BECAUSE prices have continued to rise.
There's the buying/borrowing dilemma. Wouldn't we all like a crystal ball?...
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
If you do decide that refinancing is the right approach for you to take, make sure you shop around for the best possible terms. One company we went to (the first) had a much higher interest rate and higher closing costs. When you get your credit run for a mortgage, you are allowed 30 days to shop lenders and it only counts against your credit as one "credit pull." When we checked with other lenders we were actually able to find one with one full percent lower interest rate. They also lowered our closing cost, possibly because we mentioned we were shopping lenders. Not sure of your situation but as Brent mentioned, your first property won't cash flow as it does now with a refinance. Will you have enough reserve without having to rely on the first property's rental income? That would be my concern. I am a very new investor. Others who have more experience likely have a better answer.
If I was in your shoes I would be actively shopping for another property. When I find the property I was looking for and have it under contract I would then do a cash out for my down payment but not till then so I'm not giving my bank money for no reason. You will have plenty of time to do this as closing takes a bit. I know because I have done this a couple times now.
As I look at your numbers, I see that you are in a 1M property, but only getting 1500/month in CF. Ouch!!
Then, I look at having 500k in equity, as in your money, with a return of only 1500/month. Ouch again!!!
Now, when I look at this a third time, at the potential with the 200k from a refi, and the struggles you are going to have in the market of choice to put those funds into action, I see a reduced CF while your refi funds are taken, but sitting on the sidelines...you're better off leaving it in the property until it would have somewhere to go...your next investment...see @Mike Hanneman
Me, I would take the money and run, to a different market, where your money (equity = $500k), could get you a lot more than just $1500/month. Maybe that's because I'm familiar with other markets where $100k would get you that same $1500/month, so I'm seeing the potential for $7500/month in those markets.
The only upside to pulling this equity now and not deploying it into another asset of some type for a ROIC (return on invested capital) position that you are happy with, is getting it out of an equity position which could suffer loss in the event iof a market correction. I would do the refinance for that reason alone! All other considerations notwithstanding, the best place in my opinion for equity after 25-30%, is out of the asset.
Having a 3.6% current cash-on-cash return and an outlook for depreciating property values is a tough combination. If you can earn 3% in a safe stable alternative investment, you may want to consider selling this property and putting the proceeds in that alternative investment. I understand the 3.6% includes principle reduction but that IRR excluding principle will go down and under water if you are forecasting declining property values. IMO, real estate is too much work to not get high returns.
Putting that aside, when to cash out refi can be a tough decision when you are not looking for another property. IMO, most investors in your situation sit tight until they are ready to buy or put an equity line on the property so they have quick proceeds when and if a good deal comes your direction.
I prefer to purchase cash flowing investments that perform similarly in up or down markets; so, if I were in your shoes, I would refi and purchase another property where I would not be concerned if the property value went down some during an economic downturn as long as it continued to cash flow as it would in a stable economy. My market has those types of investments, not sure if your market does. Hope this helps...good luck with your decision...not an easy one.
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
I would take out a HELOC on the property and pull money when if/when you need it. Yes, interest rates MAY go up (or they may not in the next couple years, no guarantee), but the type of correction in pricing that you seek are usually coupled with a softening economy and the powers that be don't normally respond to a softening economy by raising interest rates. While we're at it, I would not be so cavalier in assuming that inflation is on the horizon ... if anything, I'd say current signs are pointing towards deflation. It has been going for a generation in Japan. The dollar is strong, oil is weak, some other countries are going to negative interest rates ... inflation is not a sure thing by any stretch and positioning yourself on that assumption could really hurt if you are wrong. The fact of the matter is that the Fed's current experiment is historically unprecedented, and nobody really knows how it will end, but most agree that it will end and likely end badly.
I'd say the bigger risk is if/when we see a softening of RE and it is coupled with a softening economy, the bank may pull back that HELOC before you fund it. In this case, though, you would've needed financing on the property you are buying in addition to the HELOC, so that wouldn't likely fund anyhow in that case even if you had the down payment in hand. So, it is a bit of a catch 22. The other option is if you think that things really are going to soften, then sell now while they are strong and wait ... I would not recommend this, but that is another other option as I see it. Then there's the good old save like crazy from your current cash flow and personal savings to build your "war chest" until you find an investment you like.
Finally, I would take the advise of folks who live in the midwest with a rather large grain of salt ... their markets are completely different from SoCal and their advise may be sound for their market, but it does not hold water for SoCal. And yes, anytime anybody suggests that there are other ways to invest besides purely for cashflow, we get labeled speculators ... that's fine, I'll laugh all the way to the bank. The grand irony to me is to tell you that all that equity is dead money that should be redeployed in a higher cash flow market, when if you would've listened to that advise, you wouldn't have bought that property and therefore wouldn't have had that equity in the 1st place, but because you did that makes you a speculator that got lucky ... yeah, you and everybody else that has bought and held in SoCal for any significant amount of time over the last 40 years, we're all speculators that lucked out. Not to say that there aren't speculators out here, just as there are in the midwest, but to paint an entire region with the same brush just because it doesn't happen to fit their investment model is a bit much really ...
If I was in your shoes I would be actively shopping for another property. When I find the property I was looking for and have it under contract I would then do a cash out for my down payment but not till then so I'm not giving my bank money for no reason. You will have plenty of time to do this as closing takes a bit. I know because I have done this a couple times now.
Thanks. I am leaning towards your same viewpoint. I think the upside in my OP plan is too small in relation to the difficulty of timing everything right or if I don't find a deal I like and have the cash already extracted.
As I look at your numbers, I see that you are in a 1M property, but only getting 1500/month in CF. Ouch!!
Then, I look at having 500k in equity, as in your money, with a return of only 1500/month. Ouch again!!!
Now, when I look at this a third time, at the potential with the 200k from a refi, and the struggles you are going to have in the market of choice to put those funds into action, I see a reduced CF while your refi funds are taken, but sitting on the sidelines...you're better off leaving it in the property until it would have somewhere to go...your next investment...see @Mike Hanneman
Me, I would take the money and run, to a different market, where your money (equity = $500k), could get you a lot more than just $1500/month. Maybe that's because I'm familiar with other markets where $100k would get you that same $1500/month, so I'm seeing the potential for $7500/month in those markets.
Thanks John. I do see your points. Let me give a little more background to the property. I purchased it 18months ago. It is in Inglewood, CA (LA County). I purchased it at an 8% cap which was better than going market rates. I selected that area because of a large commercial/retail development nearby and the prospects of a new stadium for the LA Rams coming. I was banking on good for LA cashflow with upside in apppreciation. It worked well; I purchased for $675k.
I do agree now that the property is worth $1mil it isn't efficient to be netting $1.5k/month on $500k equity. I suppose I am trying to come up with a solution to produce more income.
I have been hesitant to invest out of my area mostly because I feel less in control and worry about making a large mistake. However the CF on deals in LA and CA are so low now that nothing looks mildly attractive to purchase. I do have one other area that I believe has good potential for for appreciation but cap rates there are only 5.5%, better than in LA county but still not great. Perhaps I need to look at out of state again.
One option would be to sell and invest elsewhere but again I have fear of investing out of my area.
Overall I am just not sure exactly what my next step should be. My goal is to build my portfolio and to increase my long term income. I am impartial whether it comes from investments of high CF and low upside for appreciation or from investments with mediocre cashflow and high appreciation potential.
$675,000 purchase price 18 months ago. $1,000,000 current market value. $325,000 increase in value/ 18 months = $18,055 a MONTH increase in net worth.
What would the Midwest plan look like to duplicate that?
What was your question?
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
1) We agree. That's the premise for me wanting to make a change. Figuring out whether that change should come in form of cash out refi now, cash out refi when I locate a deal, sell, or stay put is my options I see yet I am not sure which is right.
2) I disagree. It might be smart it might not but it is certainly investing. Lets say I knew that I want to invest in 3 yr from now and somehow I knew interest rates were going to be at 6.2% in 3 years from now. I can borrow the 200k at 4.6% now and gain 3% in earnings, resulting in me paying a net rate of 1.6% for 3 years ignoring tax benefits. This is $9k in interest costs over the holding period. Well if I waited to cash out refi until 3 yr from now I would pay 6.2% on the 200k which is 6.2%-4.6%=1.6% higher than had I refi'd now. My break even point would be 3 years into the investment. If my plan was to hold the asset for over 3 years (which it would be) I would label it "not smart" to wait to refi. What makes the play smart or not is what confidence interval we can assign to the likelihood of interest rates being over X% at time of investment. It is simply an expected value calculation with estimates on unknowns.
3a) I strongly disagree. If you pay me $500 for a roll of a die and I pay you $3000 if you guess the number correctly. Would you consider this a poor strategy and poor investment? Called it speculating, call it investing, it's irrelevant. You will lose most rolls but will profit$83 every roll. (Expected Value=$3000(1/6)-$500(5/6)=$83)
If you want a sure fire investment that simply implies your risk tolerance is low. Our job as the investor is to accurately assign estimates to the unknown variables such that we are more likely to profit than to lose. But losing does not need to be eliminated.
3b) For about 3 months I have been saying that rates are more likely to increase in the next couple years than decrease. A important distinction is that I am not saying that rates will increase, but rather they are more likely to increase than decrease. The former is enough to make a strategy to exploit this projection.
I agree with you that I am letting the market dictate my strategy. As of now I have made the decision to invest in CA only. Accordingly I am exploring ways to maximize profits in this market. You very well could be correct that I should reconsider my constraints on remaining local. It is something I am uncomfortable with but perhaps the right move. I need to think this through.
Thanks for your input, it has been helpful to make me reconsider different options.
$675,000 purchase price 18 months ago. $1,000,000 current market value. $325,000 increase in value/ 18 months = $18,055 a MONTH increase in net worth.
What would the Midwest plan look like to duplicate that?
What was your question?
Unfortunately I have no ideas like this one to execute again. I am a professional poker player in LA and had some connections through Hollywood Park Casino (The site of the new LA Rams and the large development) that gave me inclination to invest there. That play is executed so now its more likely that I will have to look for strong fundamentals and cash flow than a home run like the prior. Unfortunately I don't see many options here. I know of an area in Nor Cal that offers mediocre returns (5.5% caps) but with in my opinion upside in appreciation. Nothing that I am excited about going after yet though.
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
From his post Joe, I did not get the impression that he was unsatisfied or did not like what he was doing. I got the sense that he was doing quite well for himself, making massive ROI in equity alone in just a few short years. Equity that he can choose to, or not to, reinvest.
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
1) We agree. That's the premise for me wanting to make a change. Figuring out whether that change should come in form of cash out refi now, cash out refi when I locate a deal, sell, or stay put is my options I see yet I am not sure which is right.
2) I disagree. It might be smart it might not but it is certainly investing. Lets say I knew that I want to invest in 3 yr from now and somehow I knew interest rates were going to be at 6.2% in 3 years from now. I can borrow the 200k at 4.6% now and gain 3% in earnings, resulting in me paying a net rate of 1.6% for 3 years ignoring tax benefits. This is $9k in interest costs over the holding period. Well if I waited to cash out refi until 3 yr from now I would pay 6.2% on the 200k which is 6.2%-4.6%=1.6% higher than had I refi'd now. My break even point would be 3 years into the investment. If my plan was to hold the asset for over 3 years (which it would be) I would label it "not smart" to wait to refi. What makes the play smart or not is what confidence interval we can assign to the likelihood of interest rates being over X% at time of investment. It is simply an expected value calculation with estimates on unknowns.
3a) I strongly disagree. If you pay me $500 for a roll of a die and I pay you $3000 if you guess the number correctly. Would you consider this a poor strategy and poor investment? Called it speculating, call it investing, it's irrelevant. You will lose most rolls but will profit$83 every roll. (Expected Value=$3000(1/6)-$500(5/6)=$83)
If you want a sure fire investment that simply implies your risk tolerance is low. Our job as the investor is to accurately assign estimates to the unknown variables such that we are more likely to profit than to lose. But losing does not need to be eliminated.
3b) For about 3 months I have been saying that rates are more likely to increase in the next couple years than decrease. A important distinction is that I am not saying that rates will increase, but rather they are more likely to increase than decrease. The former is enough to make a strategy to exploit this projection.
I agree with you that I am letting the market dictate my strategy. As of now I have made the decision to invest in CA only. Accordingly I am exploring ways to maximize profits in this market. You very well could be correct that I should reconsider my constraints on remaining local. It is something I am uncomfortable with but perhaps the right move. I need to think this through.
Thanks for your input, it has been helpful to make me reconsider different options.
I am in the same boat as you Zachary. I pulled out about $150k in equity from a property in early Jan, but I have not done much with it. I invested roughly $50k in REITs for a purely passive play (I'd estimate about 60% of the $50k actually "came out of" the refi funds. And now, I am essentially paying money to the bank for no reason. I can absorb it and the mortgage interest is a nice write off, but I have so much stuff going on I didn't really have a chance to think if this was the smartest move.
Most of the multifamily syndicators are looking for accredited investors as defined by the SEC, and I not sure I am quite there yet. Midwest here I come?
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
1) We agree. That's the premise for me wanting to make a change. Figuring out whether that change should come in form of cash out refi now, cash out refi when I locate a deal, sell, or stay put is my options I see yet I am not sure which is right.
2) I disagree. It might be smart it might not but it is certainly investing. Lets say I knew that I want to invest in 3 yr from now and somehow I knew interest rates were going to be at 6.2% in 3 years from now. I can borrow the 200k at 4.6% now and gain 3% in earnings, resulting in me paying a net rate of 1.6% for 3 years ignoring tax benefits. This is $9k in interest costs over the holding period. Well if I waited to cash out refi until 3 yr from now I would pay 6.2% on the 200k which is 6.2%-4.6%=1.6% higher than had I refi'd now. My break even point would be 3 years into the investment. If my plan was to hold the asset for over 3 years (which it would be) I would label it "not smart" to wait to refi. What makes the play smart or not is what confidence interval we can assign to the likelihood of interest rates being over X% at time of investment. It is simply an expected value calculation with estimates on unknowns.
3a) I strongly disagree. If you pay me $500 for a roll of a die and I pay you $3000 if you guess the number correctly. Would you consider this a poor strategy and poor investment? Called it speculating, call it investing, it's irrelevant. You will lose most rolls but will profit$83 every roll. (Expected Value=$3000(1/6)-$500(5/6)=$83)
If you want a sure fire investment that simply implies your risk tolerance is low. Our job as the investor is to accurately assign estimates to the unknown variables such that we are more likely to profit than to lose. But losing does not need to be eliminated.
3b) For about 3 months I have been saying that rates are more likely to increase in the next couple years than decrease. A important distinction is that I am not saying that rates will increase, but rather they are more likely to increase than decrease. The former is enough to make a strategy to exploit this projection.
I agree with you that I am letting the market dictate my strategy. As of now I have made the decision to invest in CA only. Accordingly I am exploring ways to maximize profits in this market. You very well could be correct that I should reconsider my constraints on remaining local. It is something I am uncomfortable with but perhaps the right move. I need to think this through.
Thanks for your input, it has been helpful to make me reconsider different options.
I am in the same boat as you Zachary. I pulled out about $150k in equity from a property in early Jan, but I have not done much with it. I invested roughly $50k in REITs for a purely passive play (I'd estimate about 60% of the $50k actually "came out of" the refi funds. And now, I am essentially paying money to the bank for no reason. I can absorb it and the mortgage interest is a nice write off, but I have so much stuff going on I didn't really have a chance to think if this was the smartest move.
Most of the multifamily syndicators are looking for accredited investors as defined by the SEC, and I not sure I am quite there yet. Midwest here I come?
Hi Andrey. Thanks for your input and sharing. Yeah, I am starting to conclude that pulling it out now without a concrete plan of how to re invest it is leaving too many unknowns and restricting my flexibility too much.
Regarding the midwest, its an option but even the caps there aren't what they used to be. Which makes my plunge into the unknown less rewarding.
Good luck to us both.
Zach
1) the current property would still cash flow even if I take a blow torch to the 200k. The extra payment would be 1.2k and net flow currently is 1.5k
2) Even if I put the cash in a safe stable investment and for argument sake I only earn 3% and don't meet the 4.6% I'm paying, I will only be paying 1.6% net. And even less given the interest is tax deductible and the gains are at capital gains rates.
3) I don't claim to have a crystal ball nor am I able to time the market just right.
A) A optimal strategy does not need to make accurate predictions it just needs to be more right than wrong.
B) it doesn't require a crystal ball to predict that interest rates will increase. That part is almost a certainty. It's just a matter of when. And you can pretty much guarantee they won't go lower.
So by having the cash on the sidelines the idea is it allows me to wait and see if prices do drop which is not a certainty but seems more likely than continous rising. If they don't drop so be it, I will never invest the 200k into RE. I could then invest it other vehicles or just pay down the mortgage and cut my losses. The cap rates at today's levels in CA (which is where I'm investing) are way too low for me to consider right now.
4) My concern is that the cost of holding the money might outweigh the upside. It might be better to just refi cashout at the higher rates when I'm ready to invest.
My comments to your replies to @Brent Coombs:
1) $1500/month, with that much money tied up in a property isn't a good deal. once you take $200k out, and are left with $300/month CF...that isn't cash flow at that cost...that's wasted investment funds.
2) Your paying for money you're not using? Not smart...and not investing. Therest of that comment is just rationalizing a bad situation.
3a) Yes it does...or you're not an investor...your a speculator.
3b) How long have we been saying that...and what have interest rates been doing?
What you are describing as a "strategy" is based on the market of choice dictating your limits...instead of you choosing a market based on the goals you have in REI. You are allowing yourself to move forward (actually backwards in this case) based on the market rules. Yes, the market rules the market, but it shouldn't rule whichmarket you choose.
Bottom line, if you don't like the cuisine, find a different place to eat.
1) We agree. That's the premise for me wanting to make a change. Figuring out whether that change should come in form of cash out refi now, cash out refi when I locate a deal, sell, or stay put is my options I see yet I am not sure which is right.
2) I disagree. It might be smart it might not but it is certainly investing. Lets say I knew that I want to invest in 3 yr from now and somehow I knew interest rates were going to be at 6.2% in 3 years from now. I can borrow the 200k at 4.6% now and gain 3% in earnings, resulting in me paying a net rate of 1.6% for 3 years ignoring tax benefits. This is $9k in interest costs over the holding period. Well if I waited to cash out refi until 3 yr from now I would pay 6.2% on the 200k which is 6.2%-4.6%=1.6% higher than had I refi'd now. My break even point would be 3 years into the investment. If my plan was to hold the asset for over 3 years (which it would be) I would label it "not smart" to wait to refi. What makes the play smart or not is what confidence interval we can assign to the likelihood of interest rates being over X% at time of investment. It is simply an expected value calculation with estimates on unknowns.
3a) I strongly disagree. If you pay me $500 for a roll of a die and I pay you $3000 if you guess the number correctly. Would you consider this a poor strategy and poor investment? Called it speculating, call it investing, it's irrelevant. You will lose most rolls but will profit$83 every roll. (Expected Value=$3000(1/6)-$500(5/6)=$83)
If you want a sure fire investment that simply implies your risk tolerance is low. Our job as the investor is to accurately assign estimates to the unknown variables such that we are more likely to profit than to lose. But losing does not need to be eliminated.
3b) For about 3 months I have been saying that rates are more likely to increase in the next couple years than decrease. A important distinction is that I am not saying that rates will increase, but rather they are more likely to increase than decrease. The former is enough to make a strategy to exploit this projection.
I agree with you that I am letting the market dictate my strategy. As of now I have made the decision to invest in CA only. Accordingly I am exploring ways to maximize profits in this market. You very well could be correct that I should reconsider my constraints on remaining local. It is something I am uncomfortable with but perhaps the right move. I need to think this through.
Thanks for your input, it has been helpful to make me reconsider different options.
I am in the same boat as you Zachary. I pulled out about $150k in equity from a property in early Jan, but I have not done much with it. I invested roughly $50k in REITs for a purely passive play (I'd estimate about 60% of the $50k actually "came out of" the refi funds. And now, I am essentially paying money to the bank for no reason. I can absorb it and the mortgage interest is a nice write off, but I have so much stuff going on I didn't really have a chance to think if this was the smartest move.
Most of the multifamily syndicators are looking for accredited investors as defined by the SEC, and I not sure I am quite there yet. Midwest here I come?
Hi Andrey. Thanks for your input and sharing. Yeah, I am starting to conclude that pulling it out now without a concrete plan of how to re invest it is leaving too many unknowns and restricting my flexibility too much.
Regarding the midwest, its an option but even the caps there aren't what they used to be. Which makes my plunge into the unknown less rewarding.
Good luck to us both.
Zach
Amen, brother. Gold? Bitcoin? Maybe somebody else can give their input (those of us who are still awake!)
@Zachary Freeman Sounds like you should repeat your previous idea. Continue to network and scour news sites, and find another area that will have a stadium, theme park, or some other interesting development in the future. I've found these developments particularly good in boosting the revenue driven from short term/vacation rentals, even when standard/long-term rents stay flat.
$1M with a return of $1500/month? Have you considered investing in real estate internationally? I can tell you that as an example, with $200K you could in invest in 4 properties of about $50K each and at 10% yield, net pre-tax, earn income of approx. $2000/month, significantly higher than $1500 on $1M. Properties in Japan are generally occupied, so you are looking at immediate cash flow from rental income.
Investments in properties in the U.S., U.K. and Australia are intended for appreciation value. The downside is it can be expensive. Foreign investors choose properties in Japan, outside of Tokyo, for cash flow and affordability particularly during uncertain times in other markets. Insulation from inflation you might say.
I’m not sure if you are familiar with the market. If not you are probably wondering about transparency, safety, process, etc. I can send you more information if you’d like as a potential market to consider.
$675,000 purchase price 18 months ago. $1,000,000 current market value. $325,000 increase in value/ 18 months = $18,055 a MONTH increase in net worth.
What would the Midwest plan look like to duplicate that?
What was your question?
Exactly. From a strictly cash flow perspective your West Coast investment looks poor, especially to a Midwesterner and especially when appreciation, priciple reduction and rent appreciation are withheld. Your instincts are right, don't be quick to lose your place-keeper. If you had parked that $675k into a Midwest 10-cap 18 months ago you'd have set yourself back to the tune of ~$10,000 a month - OUCH!! :)
If it were me I'd tap into the $2-300k you can borrow against and look for problems only cash purchases can solve.
$675,000 purchase price 18 months ago. $1,000,000 current market value. $325,000 increase in value/ 18 months = $18,055 a MONTH increase in net worth.
What would the Midwest plan look like to duplicate that?
What was your question?
Exactly. From a strictly cash flow perspective your West Coast investment looks poor, especially to a Midwesterner and especially when appreciation, priciple reduction and rent appreciation are withheld. Your instincts are right, don't be quick to lose your place-keeper. If you had parked that $675k into a Midwest 10-cap 18 months ago you'd have set yourself back to the tune of ~$10,000 a month - OUCH!! :)
If it were me I'd tap into the $2-300k you can borrow against and look for problems only cash purchases can solve.
That is good idea. I may focus on building equity on something all cash. I also have about 100 K more free to invest. I strongly hesitate to invest out of my area. I highly value transparency, proximity, knowledge and control.
@Zachary Freeman I'm real glad I came across your post! I actually asked a similar question, but didn't get as many responses. It's a real dilemma and I think there's misunderstanding from the players who don't know California RE.
I'm also with you about NOT investing out of your area if you think there's a downturn coming. I think you lose all the advantages of being the expert in your market and proximity to your rental properties. It also doesn't sound like you're struggling that badly on cash constraints, so it's probably not worth the risk. Anecdotally, I encountered a bunch of folks from after the crash who lost everything because they over-leveraged AND they moved their equity to distant markets that they didn't understand. So, they got hamstrung by the banks and lost all their equity in other markets that dropped way worse than the Bay Area (my backyard). Even if they survived, they lost their best assets liquidating.
Unfortunately, I have yet to find my answer. My current best strategy is to have some combination of LOC's plus cash-on-hand in case of softening in the market. I've done one 1031 exchange where I at least sold at a great price, and exchanged into a larger, nicer building with the equity. The cap rate was a definite hit, but I'm hoping it's a reasonably more recession resistant property (due to location and condition). The cash income, though, as a hard number will be greater than previous, so that will add to my coffers. And of course, I'm keeping my eyes peeled for any sort of a "deal" that might advance my position. I figure if I can get anything at a 10% discount, that's cushioning for a potential 10% pullback in values. If the tech industry goes, however... I guess we all have a big setback, since we can't take our cards off the table!
On a side note, I don't know if you're familiar with California clawback laws on capital gains, but that's another barrier to doing a 1031 into an out-of-state market.
Definitely open to other ideas if anyones listening!
@Zachary Freeman Have you ever thought about being a hard money lender? My company can use your funds all day in California and give you 10-12% returns. Just a different avenue in where you can invest your cash until you find a new project.