Can someone help me with cash-out refinance?

22 Replies

Hi guys, stupid question time.

I'm looking to refinance my rental property, in order to free up cash to purchase my next rental. I was wondering if someone could help solidify the numbers for me.

Original purchase price: $125k (April 2015)

Current property value: $160-180k. 

This is a big spread, I know, but houses in the neighborhood are selling in this range and mine has some of the more desirable features (waterfront, remodeled kitchen/master bath, and tile/laminate floors where most have carpet). I feel pretty comfortable placing the appraisal at $170k.

Current mortgage balance: $94k

Current mortgage payment (including PITI + $340/mo HOA): $1030

Current monthly rent: $1450

My credit is excellent, and I have a good w-2 salary, so I assume I will get a favorable rate. However, I'm worried about the new loan cutting too much into my profit. As you can see, I'm already stretched pretty thin. The good thing about this property is the HOA covers everything outside the front door, and the water heater/AC are no problem for the foreseeable future. In other words, repairs have been (and should continue to be) minimal.

I'm ok with taking a slight hit to my profit on this deal, as long as it allows me to purchase another property to make that profit back. 

I'm hoping to net $25k cash after refinancing. Is this possible?

It'd be close and at the mercy of an appraisal you'd probably be better off getting a HELOC as the costs would be lower. If you did a cashout you're probably looking at like 3k in fees and a rate of 4.6 or greater and probably somewhere around 75% LTV.

I just did one of these. 75% LTV, 30yrs at 4.625% or 15yrs at 4.25%.

I pulled out close to what you will receive - $36k.  My cost of capital was 10% since closing costs were $3600.  

If you know you can re-deploy into a new purchase at a higher ROI than 10%, I say go for it @Tim L. If the cash is going to sit in a bank earning nothing or go into buying something 'fun' with no ROI, I'd stay in place. 

@Tim L. , I reckon it mainly depends on the quality of your next rental deal. Are you finding another waterfront condo for just $125k (though it should be worth $170-180k)?

Or, are you counting on the steady appreciation that has occurred during the last 3 years to continue over the next three? (Just curious as to how you'd spend that $25k).

ie. I believe you should be looking for instant additional equity (like in my first paragraph), rather than crossing your fingers in hope of future appreciation. My 2c...

Thanks @Steve Vaughan

That was my thought as well. I definitely have the opportunity to reinvest at 10%+ cash-on-cash ROI. I also want to get another property under my name ASAP to continue building for the future.

Like the other poster mentioned, it will all depend on the appraisal. That's the part that worries me.

could you do an appraisal before hand and if it's right price move fwd w/ cash out?

@Brent Coombs I definitely don't count on the appreciation continuing, or getting as good a deal as my last one (although I would like it to be close). I just want to put some of the equity in my current deal to use for my next one. Right now I consider that money just sitting there stagnant. I want to make it work for me to make more money.

Originally posted by @Tim L. :

Thanks Steve Vaughan

That was my thought as well. I definitely have the opportunity to reinvest at 10%+ cash-on-cash ROI. I also want to get another property under my name ASAP to continue building for the future.

Like the other poster mentioned, it will all depend on the appraisal. That's the part that worries me.

 I found the 'refi' appraisal to be pretty liberal.  I called the appraiser to ask if I needed to put straps on the water heater, clean up the yard, etc.  He said nah.  A purchase appraisal would improve with all that, but a refi with a renter in it is expected to have high grass/weeds and we don't require the code items that a purchase appraisal does, either.  

I was expecting $140k on mine, but it came in at $150.  The refi guy also didn't care that I bought it fsbo, owner-financed 2 years ago for $88.

Even if you're appraisal is $170k, your cash out should be about $33k, or $30k if closing costs aren't rolled in.

I would take a look at what your PITI would be after the refi and include vacancy, savings for cash reserves in case of eviction, cap ex and maintenance these are probably small on a newer house but make sure you at least have some liquid reserves. Does it still cashflow if the economy turns and you have to lower rents 10% or the HOA does a special assessment

Appraisals vary a LOT by location though.... some are just plain lazy and toss couple grand on purchase price.

definitely don’t get an appraisal first. You may waste $500-800. I️ just did a cash out refi, and they said they had to use an appraiser from a list of preferred vendors or some bla bla. Basically I️ couldn’t find one, to come do it and hand it over to them.

My refi: 112.5k, about 35k pulled out. Fees were $2850 4.8% 30 year fixed

If you have a good w-2 Income and can float a few negative months, pull it out and get another property. But go for a SFH. That HOA fee is killing you.

Is your current property in Palm Beach Gardens? If so, which community?

I would say you're right on the number there at 25k provided you get that 170k number for an appraisal. At 170k, you can get a loan for 127k. Figure 4 to 6k for closing costs and maybe more if you have to seed an escrow.

That leaves you with about 27k cash in hand roughly.

Your payment should only go up about 160 to 180 bucks a month. So you'll still have some room there to maybe break even or pretty close to it (assuming your current loan is also a conventional loan).

But if it helps you add another property, I would do it. You'll gain that rental income back on that one. And now you'll have principal paydown on two houses and appreciation on two houses.

Ultimately the power of scale and buy and hold can lead to significant gain in wealth.

Can you imagine if you had 20 houses worth 170k - and they appreciated 4% a year. And they had principal paydown of 160/mo? 

That being said, I don't know that I'd do too many of these deals where there is real net profit. That HOA is a bit of a killjoy to be honest. 350/mo is basically like adding 65,000 to the purchase price of the house. What could you get over there for 235k?

@Steve Vaughan I would assume the answer is 'it depends', but what would you say is an appropriate cost of capital for a refi?

On another note, during the application process during a refinance, I was asked whether or not I acquired the home through a divorce or inheritance...does anyone know why that would be relevant??

@Logan Turner can you pm me on who you used to refi? I have a client looking for 70% ltv at 6%. His score is 680 to 699.

Doran Summers

    Originally posted by @Mark Smith :

    @Steve Vaughan I would assume the answer is 'it depends', but what would you say is an appropriate cost of capital for a refi?

     I flinch at a 10% cost of capital, but can still beat it pretty easily when I re-invest it.

    Stripping equity is not always a good idea.  I've seen people 'celebrate' getting $8-10k cash out, forgetting the cost of the refi was a month of pain and $4k.  That's a cost of capital alone of 40-50%!  Better off selling something, saving or getting a 2nd job/side hustle for a little while in that case, IMO.

    Originally posted by @Steve Vaughan :
    Originally posted by @Mark Smith:

    @Steve Vaughan I would assume the answer is 'it depends', but what would you say is an appropriate cost of capital for a refi?

     I flinch at a 10% cost of capital, but can still beat it pretty easily when I re-invest it.

    Stripping equity is not always a good idea.  I've seen people 'celebrate' getting $8-10k cash out, forgetting the cost of the refi was a month of pain and $4k.  That's a cost of capital alone of 40-50%!  Better off selling something, saving or getting a 2nd job/side hustle for a little while in that case, IMO.

     Cost of pain.. bingo. 

    Damn, conventional lenders are a pain

    This post has been removed.

    @Tim L. You will need to cough up the $400-$500 for an appraisal to find out what the value is.  I would stay away from the big banks because they tend to be very conservative.  I good lender can have the appraisal ordered in 24 hours and once it is back you can make your decision from there.

    Melvin List

      @Mark Smith , the reason the applicationa asks if you got the house through inheritance or divorce, is because those two situations allow you to refinance immediately.  If you bought the house any other way, according to those government agencies Fannie and Freddie, six months’ of seasoning are required before a refinance.

      Kerry Baird

        @Brian Garrett No, the property is in West Palm Beach. I would love to find something with those numbers in the Gardens.

        @Logan Turner Thanks for the advice. HOAs are pretty prevalent down here in most relatively nice neighborhoods. The few good areas without HOAs are much more expensive. But I agree, $340/mo is killing my profit.

        @Michael Farley Thanks buddy. I'll pm you.

        @Melvin List Good advice, thanks.

        Thanks @Kerry Baird , that's what I thought, but just strange because I already told them I'd owned it for 2 years.

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