Should I refinance w/ cash-out or use my taxable account?
Most Popular Reply
New to Real Estate · MD · Member since 2020 · 7 posts · 5 votes
5y@Dan Marl sounds like option one comes with some significant penalties when option two does not. If you use BRRRR with option 2, depending on the gap between the purchase price and ARV, you can always recoup the equity cashed out and pay off the increase principal with enough to keep investing. I'd just keep investing the entire amount to help scale faster, the increase in payment will be covered by cash flow fairly quickly. There is also the HELOC option as a third, which differs slightly from the cash out, just need to identify what is the better option for you.
20 Replies
- New to Real Estate · MD · Member since 2020 · 7 posts · 5 votes5y
@Dan Marl sounds like option one comes with some significant penalties when option two does not. If you use BRRRR with option 2, depending on the gap between the purchase price and ARV, you can always recoup the equity cashed out and pay off the increase principal with enough to keep investing. I'd just keep investing the entire amount to help scale faster, the increase in payment will be covered by cash flow fairly quickly. There is also the HELOC option as a third, which differs slightly from the cash out, just need to identify what is the better option for you.
Sorry for the gigantic font. I didn't know it would show up like that lol.
Thank you Jacob for the advice. I was leaning on option 2 also but the thought of upping my loan from 227k to 737k (227+510) sounds scary.
I have never done a rehab before so I am thinking of buying a turnkey rental in cheaper states. Prices in CA are too expensive to make sense.
- Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes5y
@Dan Marl you’re gonna have to pay off the $227K mortgage when you get the new $510K mortgage.
You’re borrowing $510K, but you’ll “only” receive $283K less costs at closing.
Please be sure you understand all of this.
There are also ways to use your stock portfolio as a line of credit without selling and triggering a tax event.
- Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes5y
I'd say putting trapped equity to work is much better than selling stocks that are doing well for you. It definitely is more leveraged, and therefore higher risk. I wouldn't leverage my primary in this market unless I found a "can't miss deal"
I’m a big proponent of a very specialized 1st position Heloc that’s tied to a zero balance sweep checking account. My wife and I set one up on our primary while it was our primary (now rental) and it’s been an awesome tool for us. That sweep account allows all of our checking deposits/idle funds to sweep directly towards our outstanding balance, saving us a ton of interest cost. We retain access to 80% of our equity. Currently we're putting some of that equity to work in the stock market, while saving more (having it work on the line) that we'll put to work when the market turns. It's nice because we don't pay for our equity access until we use it, rather than locking in 30 years of higher payments day one
I always recommend anyone who qualifies to check it out. Best of luck in your next steps! - Warsaw, IN · Member since 2017 · 229 posts · 270 votes5y
@Dan Marl I’ll be the contrarian here-stocks are doing great because 25% of the dollars ever created were made in the last 12-15 months and the Fed still has to purchase $120 BILLION every month to keep it going.
My taxable account was much smaller than yours when I liquidated it. For me, Option 1. Take the taxable hit now (when taxes are at historic lows) and put it into RE.
Originally posted by @Joseph Schweizer:
Hi @Dan Marl!
How would you get a loan for 737k on a home that is worth 688k?
I haven't done a refinance cash-out before so I am sure if my math is 100% correct. The mortgage broker said I cash out 510k. Therefore the loan would be 510k correct?
Originally posted by @Dan Schwartz:
@Dan Marl you’re gonna have to pay off the $227K mortgage when you get the new $510K mortgage.
You’re borrowing $510K, but you’ll “only” receive $283K less costs at closing.
Please be sure you understand all of this.
There are also ways to use your stock portfolio as a line of credit without selling and triggering a tax event.
Ah, that makes sense about the refinance cash out.
How or where can I get a line of credit for my taxable stock account?
Originally posted by @Rob Golob:
@Dan Marl
Where/how are you going to get a 2.60 fixed?
I use loanfactory.com. My other mortgage broker offers 2.75%.
- Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes5y
@Dan Marl most, if not all, brokerages will offer margin loan using your portfolio as collateral. It’s not hugely different than your cash out loan: your asset is valued, then the bank (brokerage) will loan you a certain percentage of that value and hold your asset as collateral. A major difference is that the brokerage will liquidate your asset (or ask you to post more collateral) if the value falls too much.
Walk before you run. Of the two options (cash out refi and margin loan), the cash out refi is far more stable and secure. I’d start there. You understand the mechanism, and have said that you can afford the higher payment.
When you are ready to take a step after that, consider tapping your taxable portfolio via a margin loan. You’d probably be able to get a loan equal to at least 65% of your portfolio, but it all depends on your specific holdings. The concept is simple (see the above comparison to a cash out refi), but the calculations can be complex. Learn more about it wherever you currently hold your portfolio, and then you also might look at Interactive Brokers, which has interest rates in the low 1.00s for portfolios of your size.
Good luck!
Originally posted by @Justin Phillips:
I'd say putting trapped equity to work is much better than selling stocks that are doing well for you. It definitely is more leveraged, and therefore higher risk. I wouldn't leverage my primary in this market unless I found a "can't miss deal"
I’m a big proponent of a very specialized 1st position Heloc that’s tied to a zero balance sweep checking account. My wife and I set one up on our primary while it was our primary (now rental) and it’s been an awesome tool for us. That sweep account allows all of our checking deposits/idle funds to sweep directly towards our outstanding balance, saving us a ton of interest cost. We retain access to 80% of our equity. Currently we're putting some of that equity to work in the stock market, while saving more (having it work on the line) that we'll put to work when the market turns. It's nice because we don't pay for our equity access until we use it, rather than locking in 30 years of higher payments day one
I always recommend anyone who qualifies to check it out. Best of luck in your next steps!Thank you Justin for the informative reply. I have never heard of a position (lien?) HELOC before. However, wouldn't the rate of the HELOC change depending on the Fed rate?
Thanks
- Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes5y
Originally posted by @Dan Marl:
Originally posted by @Justin Phillips:
I'd say putting trapped equity to work is much better than selling stocks that are doing well for you. It definitely is more leveraged, and therefore higher risk. I wouldn't leverage my primary in this market unless I found a "can't miss deal"
I’m a big proponent of a very specialized 1st position Heloc that’s tied to a zero balance sweep checking account. My wife and I set one up on our primary while it was our primary (now rental) and it’s been an awesome tool for us. That sweep account allows all of our checking deposits/idle funds to sweep directly towards our outstanding balance, saving us a ton of interest cost. We retain access to 80% of our equity. Currently we're putting some of that equity to work in the stock market, while saving more (having it work on the line) that we'll put to work when the market turns. It's nice because we don't pay for our equity access until we use it, rather than locking in 30 years of higher payments day one
I always recommend anyone who qualifies to check it out. Best of luck in your next steps!Thank you Justin for the informative reply. I have never heard of a position (lien?) HELOC before. However, wouldn't the rate of the HELOC change depending on the Fed rate?
Thanks
With this loan, it's less about the interest rate and more about interest cost. When all your regular deposits and idle funds are sitting on your balance, your payoff timeline is greatly condensed. Even at that average interest rate over the last 25 years, the interest only cost will be cheaper than a fully loaded PI payment.
My wife and I are currently putting those idle funds to work, increasing our cashflow, and when the market turns we'll simply write a check and buy the next property from our line.
For those who qualify, it's a great financial tool to have in your toolbelt!
Originally posted by @Nick Barlow:
@Dan Marl I’ll be the contrarian here-stocks are doing great because 25% of the dollars ever created were made in the last 12-15 months and the Fed still has to purchase $120 BILLION every month to keep it going.
My taxable account was much smaller than yours when I liquidated it. For me, Option 1. Take the taxable hit now (when taxes are at historic lows) and put it into RE.
Thank you for your advice Nick. If I liquidate some of my stocks, I would be hit with a 15% long-term capital gains tax. I can see your point of view. But I would have opportunity costs (assuming stocks keep going up).
I would keep your advice in mind. Thanks
Originally posted by @Dan Schwartz:
@Dan Marl most, if not all, brokerages will offer margin loan using your portfolio as collateral. It’s not hugely different than your cash out loan: your asset is valued, then the bank (brokerage) will loan you a certain percentage of that value and hold your asset as collateral. A major difference is that the brokerage will liquidate your asset (or ask you to post more collateral) if the value falls too much.
Walk before you run. Of the two options (cash out refi and margin loan), the cash out refi is far more stable and secure. I’d start there. You understand the mechanism, and have said that you can afford the higher payment.
When you are ready to take a step after that, consider tapping your taxable portfolio via a margin loan. You’d probably be able to get a loan equal to at least 65% of your portfolio, but it all depends on your specific holdings. The concept is simple (see the above comparison to a cash out refi), but the calculations can be complex. Learn more about it wherever you currently hold your portfolio, and then you also might look at Interactive Brokers, which has interest rates in the low 1.00s for portfolios of your size.
Good luck!
Hello Dan,
I didn't know you can take a margin loan off of my taxable account. You are right that it seems risky even though the interest rate is low. I am a long-term investor in the stock market I don't care for fluctuations. It scares me to know that if there is a stock market correction the brokerage can liquidate my account if it falls below a certain threshold.
Originally posted by @Justin Phillips:
With this loan, it's less about the interest rate and more about interest cost. When all your regular deposits and idle funds are sitting on your balance, your payoff timeline is greatly condensed. Even at that average interest rate over the last 25 years, the interest only cost will be cheaper than a fully loaded PI payment.
My wife and I are currently putting those idle funds to work, increasing our cashflow, and when the market turns we'll simply write a check and buy the next property from our line.
For those who qualify, it's a great financial tool to have in your toolbelt!That's a really awesome idea. Only use the HELOC when there are opportunities!
- Lender · Phoenix, AZ · Member since 2018 · 440 posts · 256 votes5y
Originally posted by @Dan Marl:
Originally posted by @Justin Phillips:
With this loan, it's less about the interest rate and more about interest cost. When all your regular deposits and idle funds are sitting on your balance, your payoff timeline is greatly condensed. Even at that average interest rate over the last 25 years, the interest only cost will be cheaper than a fully loaded PI payment.
My wife and I are currently putting those idle funds to work, increasing our cashflow, and when the market turns we'll simply write a check and buy the next property from our line.
For those who qualify, it's a great financial tool to have in your toolbelt!That's a really awesome idea. Only use the HELOC when there are opportunities!
Exactly, so you don't have opportunity cost of trapped equity, or the holding costs of cash-out.
- 5yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 4k+ votes
@Dan Marl
No one can properly give you feedback until you tell the audience what type of real estate you plan to invest in and at what price point.
If your stock investments did as well as you say they did, you may have to consider tax consequences upon a sale.
Basit Siddiqi CPA4.880 Reviews - Financial Advisor · Portland, OR · Member since 2021 · 45 posts · 21 votes5y
If you want to ultimately live off of rental income, why would you increase your home costs? That makes your goal less attainable as you now have to cover more costs. Your taxable account is only going to be taxed on the gains, so find out from a tax advisor what the taxes will be before making the decision. Margin trading is an absolute terrible idea as it is complex, riddled with fees, and incredibly risky. I think you should figure out the cash flow you will need to accomplish your goal, then see which decision makes the most sense with that in mind.
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