Refinancing primary residence, considering cash out to invest

Multi-Family and Apartment Investing

Refinancing primary residence, considering cash out to invest

Member since 2020 · 10 posts · 1 vote

Hello,

I'm currently refinancing my primary residence, I can either do a rate/term refi and get 3% interest rate, or get roughly $90k cash out and get 3.5% interest rate.

I'm considering getting the cash out to launch my real estate investing career. My goal is to quit my job eventually. I've read the biggerpockets book on small multi family investing, however, I'm reading that it's really hard to cash flow these days. I'm willing to invest anywhere in the country, I live in the bay area. Any thoughts on this? I don't have a specific property or market in mind, but I've looked at markets like Stockton and Fresno. Ideally, for my first investment, I would want to be within a 3-4 hour drive, but I'm willing to invest out of state as well if that's what it takes for cash flow.

Is it worth taking out that $90k? I'm okay with the 3.5% interest rate. If I can't find a good property, I would consider using the $90k to pay off my wife's student loans, and we'll start saving money monthly immediately.

Thanks!

74 views

Most Popular Reply

Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes

4y

In my opinion it would certainly be advantageous to take the $90k at a 3.5% interest rate. There are multiple ways to return higher than 3.5% ROI and whatever the premium rate of return you make from the $90k is, that's your keep. That's the same strategies banks use and it's amazing to be able to use that strategy to profit like they have proven useful.

Whether or not you can deploy it into a property is a secondary question in my mind. 1st, get the cash and deploy in something liquid with an above 3.5% ROI, then work to identify your ideal property market.

See this reply in the discussion

24 Replies

Jump to latestLatest

Sort by

Will Fraser
Real Estate Broker · Salt Lake City & Oklahoma City · Member since 2018 · 3k+ posts · 2k+ votes
4y
In my opinion it would certainly be advantageous to take the $90k at a 3.5% interest rate. There are multiple ways to return higher than 3.5% ROI and whatever the premium rate of return you make from the $90k is, that's your keep. That's the same strategies banks use and it's amazing to be able to use that strategy to profit like they have proven useful.
Whether or not you can deploy it into a property is a secondary question in my mind. 1st, get the cash and deploy in something liquid with an above 3.5% ROI, then work to identify your ideal property market.
6 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Will Fraser:
In my opinion it would certainly be advantageous to take the $90k at a 3.5% interest rate. There are multiple ways to return higher than 3.5% ROI and whatever the premium rate of return you make from the $90k is, that's your keep. That's the same strategies banks use and it's amazing to be able to use that strategy to profit like they have proven useful.
Whether or not you can deploy it into a property is a secondary question in my mind. 1st, get the cash and deploy in something liquid with an above 3.5% ROI, then work to identify your ideal property market.

Thanks for the response. Do you have any examples of liquid investments generating greater than 3.5% ROI?
0 Reply
Nizar BasmaPro Member
San Jose, CA · Member since 2017 · 31 posts · 15 votes
4y
I agree with @Will Fraser in that you need to identify the market you want to invest in. Figure out what your real estate investment goals are and that will guide you in which direction to take.
Good luck!
Nizar Basma
0 Reply
Dwayne Poster
Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
4y
I would spend more time with the calculator. How long are you into your current mortgage. Refinancing is going to reset the gains you’ve made on PI ratio, and should be part of your consideration.
2 Reply
Jon KellyPro Member
Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes
4y
@Hardeep S. take the $90k and buy your first property.
The difference between 3% and 3.5% is minimal. Don't touch the student loans with this money.
You said your goal is to "quit my job eventually" and "launch my real estate investing career." Assuming you've thought long and hard about your goal(s) and you believe in it wholeheartedly then anything you do to delay the goal is less important.
0 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Dwayne Poster:
I would spend more time with the calculator. How long are you into your current mortgage. Refinancing is going to reset the gains you’ve made on PI ratio, and should be part of your consideration.

I’m not far in at all, about 9 months into the mortgage.

1 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Jon Kelly:
@Hardeep S. take the $90k and buy your first property.
The difference between 3% and 3.5% is minimal. Don't touch the student loans with this money.
You said your goal is to "quit my job eventually" and "launch my real estate investing career." Assuming you've thought long and hard about your goal(s) and you believe in it wholeheartedly then anything you do to delay the goal is less important.

That’s definitely my goal, small multifamily real estate is what I’ve researched. I wholeheartedly believe I want to quit my job as my end goal, but can I say in confidence multifamily investing will get me there? I’m not sure.

Also worth mentioning I have about $50k in cash of my own to invest. Not sure if that would be enough so that’s why I was considering taking out the cash out refi, not only to my fund my first property, but potentially my second as well.
0 Reply
Adam Peisker
Member since 2020 · 1 post · 0 votes
4y
9 months in on the mortgage and able to take out 90k..... that's an impressive, do tell the back story!
0 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Adam Peisker:
9 months in on the mortgage and able to take out 90k..... that's an impressive, do tell the back story!

Bay Area houses have been appreciating like crazy! No other back story haha.
0 Reply
Dan Nutter
Investor · San Diego, CA · Member since 2021 · 16 posts · 17 votes
4y
I'd say do the cash out refi. 1) Interest rates will be going up, and most of us have forgotten have ridiculously low a 3.5% mortgage is. 2) You nearly triple your cash on hand for doing "other things." 3) You know you want to jump into the game, and having cash "sitting" may push you into into action. 4) Hell, worst case you open a BlockFi crypto account and earn 8.5% interest on that $90k :D
2 Reply
Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
4y
@Hardeep S.you didn't mention what the principal is on your mortgage, however, the difference between 3% and 3.5% is pretty minimal. This one is a no brainer in my opinion. You may never have another opportunity to have access to that much cash that cheaply. I regret that I didn't do that with my first home and get started much sooner. I wouldn't hesitate to do the cash out and invest it. I would then use the cash flow to pay down the student loan. If you use the proceeds from the cash out refi to pay off the student loan, you'll be paying off that debt for the life of the mortgage. You're just trading one debt for another. As far as where to invest, I definitely would not invest in Stockton or Fresno. To buy something that would be even remotely affordable (which still will not cash flow), you'll be limited to rough neighborhoods that will be a nightmare for you. Not only will you end up with high risk tenants, CA is not landlord friendly at all and you can easily find yourself stuck with horrible tenants that you can't get rid of. I would recommend investing in more affordable, better cash flowing markets that are more landlord friendly. I like the Midwest, particularly Kansas City, Indianapolis and the Quad Cities (Davenport IA) as well as some parts of OH.
2 Reply
Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
4y
While the difference between 3% and 3.5% is minimal, that isn't actually what you're evaluating. If your current principal is $650k and you cashout, you're paying an extra 0.5% on $650K which is really an interest cost of the $90k. If you evaluate the weighted cost of capital as 3% for your principal since that's what you'd be forgoing, then the equivalent interest rate on your $90k is nearly 7.5%.
((650K*3%)+(90K*7.5%))/(740K)=3.5%
To say it another way, you'd be better of borrowing that $90K with any other loan option charging interest up to 7.5%. Now if this is your only option to invest maybe it is still worth it, but don't think you're borrowing at 3.5% because you're not.
1 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Matt Devincenzo:
While the difference between 3% and 3.5% is minimal, that isn't actually what you're evaluating. If your current principal is $650k and you cashout, you're paying an extra 0.5% on $650K which is really an interest cost of the $90k. If you evaluate the weighted cost of capital as 3% for your principal since that's what you'd be forgoing, then the equivalent interest rate on your $90k is nearly 7.5%.
((650K*3%)+(90K*7.5%))/(740K)=3.5%
To say it another way, you'd be better of borrowing that $90K with any other loan option charging interest up to 7.5%. Now if this is your only option to invest maybe it is still worth it, but don't think you're borrowing at 3.5% because you're not.

Yes, 100% this. My principal is roughly $850k. I haven't explored any other avenues where I could get this much cash. I did calculate how much in extra interest over the lifetime of the loan I would pay if I take $90k out compared to no cash out, it's an extra ~$145k over 30 years.

0 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Mike D'Arrigo:
@Hardeep S.you didn't mention what the principal is on your mortgage, however, the difference between 3% and 3.5% is pretty minimal. This one is a no brainer in my opinion. You may never have another opportunity to have access to that much cash that cheaply. I regret that I didn't do that with my first home and get started much sooner. I wouldn't hesitate to do the cash out and invest it. I would then use the cash flow to pay down the student loan. If you use the proceeds from the cash out refi to pay off the student loan, you'll be paying off that debt for the life of the mortgage. You're just trading one debt for another. As far as where to invest, I definitely would not invest in Stockton or Fresno. To buy something that would be even remotely affordable (which still will not cash flow), you'll be limited to rough neighborhoods that will be a nightmare for you. Not only will you end up with high risk tenants, CA is not landlord friendly at all and you can easily find yourself stuck with horrible tenants that you can't get rid of. I would recommend investing in more affordable, better cash flowing markets that are more landlord friendly. I like the Midwest, particularly Kansas City, Indianapolis and the Quad Cities (Davenport IA) as well as some parts of OH.

Thank you for the response. The principal is around $850k.

0 Reply
Navid A.
Investor · San Rafael, CA · Member since 2021 · 39 posts · 32 votes
4y
Another option is to look at getting a HELOC on your primary residence. You won't be paying interest on the money unless you are using it. The rates maybe higher (and variable) though but I have seen 3.75%…But then you still keep the 3% on the original mortgage.
90K is not going far is the Bay Area. But you can put that as DP in Midwest and buy a class A duplex (less cash flow more appreciation) or C quadplex (opposite). Best bang for your buck would be to buy value add opportunities (off market) where you could force appreciate by Reno or raising rents.
4 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Another question everyone - my monthly mortgage will go up by about $650 if I take the cash out. For me to consider taking the cash a success, should I only judge that by seeing more than $650 cash flow a month on my investment? I understand appreciation also helps, but I’m not counting on that yet.
Also, is it realistic to be able to expect $650 or more cash flow with $90k down payment? I know Brandon’s book says $150 or more cash return per door is average, it might be a stretch im thinking to exceed $650.
0 Reply
Navid A.
Investor · San Rafael, CA · Member since 2021 · 39 posts · 32 votes
4y
It’s not likely you would get $650 CF with 90K DP. Specially if you buy already stabilized MF. If you buy off market then do rehab, then raise rents you could get $650 or more in CF. But that process takes time and patience given the market as well as finding the right boots on the ground. Even stabilized MF are selling over asking and considering with over 4.25% interest rates on MF. Good CF is hard to get (at lease for short term).
1 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
Originally posted by @Navid A.:
It’s not likely you would get $650 CF with 90K DP. Specially if you buy already stabilized MF. If you buy off market then do rehab, then raise rents you could get $650 or more in CF. But that process takes time and patience given the market as well as finding the right boots on the ground. Even stabilized MF are selling over asking and considering with over 4.25% interest rates on MF. Good CF is hard to get (at lease for short term).

Thank you so much. Does that mean it’s not a great choice to take the cash out? I want to at least profit from it.

If I combine the $90k with my own $50k, do you think with a DP of $140k I can profit $650 a month?

0 Reply
Navid A.
Investor · San Rafael, CA · Member since 2021 · 39 posts · 32 votes
4y
I can't tell you if it's good or bad choice to take the 90k out. There are people who take that 90K buy a house cash, flip it and make 30k-50k in 6 month. There are people who take that 90K, rehab the property and make 600-800 in CF. There are people who buy STR and make 1000+ in CF. But that takes risk and hard work/network..
I don’t think you should combine that 50k with the 90K to put as DP. It may make sense to put 90K as DP and use part the 50 K to rehab the property to add value. You also need to look at your exit strategy.
Another option would be as I said get a HELOC on your primary. Then put that 50k down on a MF and use the HELOC to pay for Reno etc. Again you need to look at your exit strategy.
1 Reply
Dwayne Poster
Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
4y
HELOC is a great tool to preserve, and allow a maturing mortgage to improve the PI ratio, improving your equity position, which improves your borrowing capacity. Being daily interest accounts, if you drive all of you income through the loan, you can effectively lower overall interest loading. I have established a stream of refinances, but the bulk of my holdings are in maturing mortgages, and that's where I like to spend my time.
0 Reply
Hardeep S.
OP
Member since 2020 · 10 posts · 1 vote
4y
If I'm looking to invest long term, is a HELOC still a good idea? I've usually read they're best if you plan to pay off quickly. I was initially looking to buy and hold MF long term if it's cash flowing.
0 Reply
Navid A.
Investor · San Rafael, CA · Member since 2021 · 39 posts · 32 votes
4y
One way is to use the HELOC to buy the property and then refinance the property asap (with 30 yr fixed mortgage) and pay back the HELOC. Of course you are not gonna pay back the whole amount as it depends on the appraisal at the time of refi. But you should be able to refinance up to 70-75%.. There are more information on HELOC and cash out refi if you search the forums in the past.

0 Reply
Dwayne Poster
Investor · Van Isle · Member since 2021 · 455 posts · 226 votes
4y
Originally posted by @Navid A.:
One way is to use the HELOC to buy the property and then refinance the property asap (with 30 yr fixed mortgage) and pay back the HELOC. Of course you are not gonna pay back the whole amount as it depends on the appraisal at the time of refi. But you should be able to refinance up to 70-75%.. There are more information on HELOC and cash out refi if you search the forums in the past.

What would be the advantage of this be over 25% down from heloc and mortgage, at one less transaction?

0 Reply
Navid A.
Investor · San Rafael, CA · Member since 2021 · 39 posts · 32 votes
4y
The advantage is you are doing a “cash offer” and have a higher chance of getting your offer accepted among 10 other offers.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.

Log In Join for Free