We have decent chunk of cash ready to invest in our first rental property. In looking at deals, I see some that we could potentially pay cash for. The benefits I see are quick closing and possibly getting a better deal because of a cash offer. However, we'd want to get 75-80% of that money back if we bought with cash, which I understand you can do with a refi. Is this a sound idea? What are the possible downsides?
@Brian Dickerson it really depend on your investment market, the property type and how long you can comfortably leave your money parked. I have done this several times and most recently just finished the refi last month on a 6 plex. The property was bought in cash, which made for a shorter closing. The property appraised approx. $200k over purchase price, 1 year after purchase. We did nothing to it, just rode the appreciation wave. If you are buying a single family home, you can pull your money out but it is usually better to "season" the property for 12 months. Hopefully you will get some appreciation and the banks will use the higher value. However, if you do it in less time, they will just use your purchase price so you might not be able to access any appreciation gains.
High risk you will not get enough money back unless you can buy below market or add value before refinance. Ideally you want to get 100% back otherwise it is not a good idea to park your cash in real estate. Espically now when speculation points toward markets dropping in the future.
Also realize a refi will be an extra .5% or so higher interest rate than a mortgage with a purchase. (assuming conventional loan)
If it’s a great deal and a cash offer will get you the deal or a better price, go for it. But for you’re not renovating and adding value (BRRRR as the folks here call it), you might as well just get a mortgage on purchase.
Yep, solid idea, and one of the best ways to go. You're more likely to land a property if you offer cash for it. Just be established with a lender who is licensed in the state you are buying in, preferably an investor-friendly one, and check with them before you buy on anything you need to know about doing the cash-out refi. The real trick is which lender you use. Use the right one, you're in like Flynn. Wrong one, the refi will never happen. For example, the big banks are unlikely your best friends for the cash-out.
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