Cash out Refinancing; How much equity should I keep?

7 Replies

I’m debating how much equity I should hang onto when refinancing a property where I own in cash.

A buddy told me maintaining 40% was a good conservative number but it sounds like a lot? I don’t want to hamstring my ability to grow my rental business.

How much equity do you think would be a good approach to hold onto? I was thinking 30%

Most financial institutions will only let you finance 70-75% of a property's assessed value, therefore leaving 25-30% equity with the home. If the banks are comfortable with that, it will likely be good enough for you as an investor who is trying to leverage your money. 

Additionally, when leaving equity in the property, don't forget to look at the cash-on-equity return. If its too low, your money isn't working hard enough for you. 

Best of luck to you!

@Justin White Thanks for your response. So a financial institution wouldn't let me finance 60% of the property's assessed value? 

Side question: If they did, would that be too conservative?

They typically allow up to 70-75%, so 60% would be fine. I wouldn't worry about how conservative it is, just focus on what works best for you. If property values are going down in your area, then a more conservative approach may be appropriate. If not, maybe you want to finance the full 70% and get yourself another deal. 

Honestly, I just want to make sure I have manageable monthly payments and don't over-leverage which is why 60% to 65% was my target

My rule was to refi @ 65% LTV with a 15 year amortization, and small positive cash flow. However, my goal was to create a retirement account of paid off properties, which has worked quite well.

Your own risk tolerance will determine how much to leave on the plate.  Always keep in mind that leverage is a two-edged sword.

@Rob Bianco

You really need to determine your goal. How much of a loan/payments can you or the property afford? How much equity do you want back? Are you looking to max your cash out? Etc

Basically, do you want cash or cash flow... and does it make sense to make the loan...