I have investment properties with fixed rates of 3.375%, 4.5%, and 4.375%. There has been several six figures $$ in equity growth over the last several years, and my LTVs have recently been pushing 50%. I am looking to refi one or more of these back up to at or near 80% LTV, to pull out all that equity just sitting there.
I know interest rates are up, but at what point (0.5%, 0.75%) etc. higher rate would you say that it wouldn't be worth doing this? I appreciate your feedback.
@Andrey Y. the interest rate is completely irrelevant. If its 4% or 18% it doesnt matter. what matters is what are you doing with that money. Are you going on a $20,000 vacation or buying a new car or are you reinvesting the money and getting a return on that investment? I borrow money at 15% sometimes and I make a lot of money in return.
To summarize. Buy assets. Buy good investments. Borrow money at the lowest rate possible but dont let the interest rate cloud your judgement.
Great question!
I really can't answer since I don't know what you are going to do with the money you are taking out.
If it's holding you back from making 15% returns from rental property the rate you are going to get on the cash-out shouldn't matter that much. Right?
I believe I answered that question earlier in the thread.
I have to admit there is something nice knowing that you have only so much leverage in a deal.
I agree with Andrew Johnson on this one, for this phase in the RE cycle. To throw in a contrarian spin ... if you are going to go cash out refinance to invest the equity, then the best time to do that IMO is AFTER the market crashes. 1)If all the numbers still work out with the property you are cashing out on in a crashed market, then you probably have a good margin of safety. 2)There are more great deals to buy with the money you pull out after a market crashes. 3)Often times the best (lower) rates are to be had when the economy is in distress. To be fair the counter arguments are that it can be harder to cash out refi after a crashed market, but I've never had an issue, and cash out refinancing after a crash probably won't likely make you all feel all "warm and cuddly", which is part of the reason it works so well.
After a market crash, lets say Hawaii properties lose 15-20% of their value (like they did in 2008-2010. Some condos in Vegas, Pheonix, and Miami lost 80-90%). Even if there were lower rates, wouldn't I be able to pull out LESS equity since appraisals will be lower?
Correct, there would be less equity to pull, but that equity would buy you far better deals on far more property, and you'd know for sure at that time which markets are 80% off, and you would be more assured that you would be able to carry that extra debt (still not guaranteed), because if you don't have neg. equity and can service the debt AFTER things crash, then you sure as heck can much easier once they recover. Put it the other way around, if you pull too much BEFORE it crashes, you could have negative equity and fewer options AFTER it crashes, so in that case if that were to come to fruition then IMO you would be better off in that case not pulling as much out in a hot market, but that is tough to guage before such an event ... much easier after. I cash out refinanced my former primary residence in 2012 to fund the down payment on my new primary residence, so I "eat my own cooking" and as result got double appreciation coming off the bottom ... To me, it goes back to the whole contrarian philosophy of be scared when others are greedy and greedy when others are scared. Your mileage and next correction may vary, of course
If your ROI is higher than the interest rate it is worth it. Obviously the higher the ROI and the lower your interest rate the better. It might not be worth your time or risk to trade a nickel for 6 cents.
The one idea I didn't see here is to sell one or all of them. You could pull out all of your equity (minus fees) out at a 0% rate. You would also no longer have to deal with that asset.
In the meantime soak up your cashflow, know your options, and be in a great position for when the next great deal comes along.
I like the way you broke down this cost of capital, Chris. It helped me see it in black in white.
But one thing was forgotten. No, two things.
The hard costs of the refinances will run about $4k each. New cost = $10,750 = 10.75%
For the pain and suffering of proving to an entity that I am credit-worthy I charge $2,000 an hour to gather my finances and put hat in hand. 3 hrs min. Actual cost now = $16,750 = 16.75%.
For me it would mean a nap. No action. Too much work and risk to beat 16.75%.
I like the way you broke down this cost of capital, Chris. It helped me see it in black in white.
But one thing was forgotten. No, two things.
The hard costs of the refinances will run about $4k each. New cost = $10,750 = 10.75%
For the pain and suffering of proving to an entity that I am credit-worthy I charge $2,000 an hour to gather my finances and put hat in hand. 3 hrs min. Actual cost now = $16,750 = 16.75%.
For me it would mean a nap. No action. Too much work and risk to beat 16.75%.
Steve.. that cost of capital % sure blew up!! Feeling like a 'glass half empty' sort of day?
The refi closing costs are rolled into the new loan .. would you still add 10% to the 6.75% then? ;)
I like the way you broke down this cost of capital, Chris. It helped me see it in black in white.
But one thing was forgotten. No, two things.
The hard costs of the refinances will run about $4k each. New cost = $10,750 = 10.75%
For the pain and suffering of proving to an entity that I am credit-worthy I charge $2,000 an hour to gather my finances and put hat in hand. 3 hrs min. Actual cost now = $16,750 = 16.75%.
For me it would mean a nap. No action. Too much work and risk to beat 16.75%.
If your time is worth $2k/hr, you should never do a cash out refinance. You should work 26 hours extra a week for two weeks, and boom you've got your $100k. :) These people certainly exist, typically with a more lavish lifestyle to match, but they still set enough aside to buy a few properties a year without ever doing cash out refinances.
Great question!
I really can't answer since I don't know what you are going to do with the money you are taking out.
If it's holding you back from making 15% returns from rental property the rate you are going to get on the cash-out shouldn't matter that much. Right?
I believe I answered that question earlier in the thread.
I have to admit there is something nice knowing that you have only so much leverage in a deal.
I agree! My neighbor is adamantly against cash-out refinancing because you are always keeping your balance sheet leveraged - therefore if any significant downturns happen you don't have ANY equity.
He bought a duplex in LA in the 1970s. He kept doing cash-out refinances to jack-up his IRR. However, he almost lost it in the late 70s after a downturn.
If he had held on it would be worth around $4 million now and paid-off.
It's a matter of what you plan on using the funds for, what you're paying right now, your overall expenses, current financial situation, etc. If you're looking to tap into the capital in your house and use it for a down payment on another property, then refinancing at a higher rate could potentially make sense if you count the delta between your current and increased mortgage payment as a recurring cost on your new property and it still cash flows.
If you're looking to lock in low rates and don't plan on living in the house for too much longer, I'm a fan of ARMs (I'm also 27, therefore not likely to remain in one place for an extended period of time at this point).
Whether the closing costs of $4k are rolled into the new loan or one applies the rationale that 'your tenants are paying for it, so what's the diff?' - it is still a cost. I would definitely add the 4%. You have a real cost of 10.75%.
I and most could reinvest into a local asset we can see and touch and control at a much higher return that 10.75%. But a syndication where you have no say? No control? Starting out with a break-even bar of 10.75%? Up to you. I would have a different purpose for that capital. Congrats on having options either way!
LOL - just trying to make a point. I do try to place a high dollar 'pain cost' to things I hate to do. Scroungiing up all my little statements and financial docs to try and prove I am credit-worthy is right up there. Same for building a website, digging, roof work, etc. Things I'm not good at or dislike. Not trying to be self-righteous!
@Jim D. Yeah, I don't get the "SOCA sweats" but I do get agitated when I have undeployed capital sitting in a bank account (separate from the reserve fund). But that's a little bit different that levering up.
My challenge with most of the "analysis" that's done on leveraged returns is that it always looks at the period starting from 2009 or 2010. It's as though the analytical ecosystem chooses to apply "leverage gains" to 2009 but completely avoid ever talking about "leverage losses" from properties bought from 2003-2008. It's as though that historical period never even existed. Nobody ever posits:
1. Even if you didn't lose the property like @Jimmy Moncrief's neighbor in the 70's, how many years of negative cash-flow did an owner have to endure during the down cycle?
2. How many years of positive cash-flow during the recovery/appreciation cycle went to offset those negative cash-flow years?
3. How much of the cash-flow during the recovery was based on rent increases versus interest rate drops?
4. Do you think (if there is another correction: large or small) that interest rates will fall to the literal historic lows again?
The net result for me when I look at a situation like @Andrey Y.'s is that they are at a point where they have crazy low interest rates. Presumably are making great cash-flow as well on their investments. It would be really hard to screw that up and would likely be safe in any correction. Conversely, if you map that against going towards maximum 80/20 leverage, reducing the ability to the property to self-support in a correction, etc. then you increase the odds of "losing it all". If there's a large-ish correction you don't go upside down in one property, you go upside down in ALL of them. You don't go negative cash-flow in one property, you go negative in ALL of them.
Granted, I think there's a very low probability that nightmare scenarios like this will happen. But the juice has to be worth the squeeze. Do I want to increase my risk-potential for another $5K per year? Nope, it's just not worth it to me.
@Steve Vaughn
You're taking one time costs and adding it to the yearly costs. New cost wouldn't be 10,750/100k = 10/75, but would more closely be related to 6,750/96k = 7%.
Granted I think your point was the same as others have mentioned and that it depends on what your time is worth, as well as the cost of money vs extra money you'll be bringing in.