How much cash out would you take?

27 Replies

We purchased a rural, small multi-family (12 units) in July of 2017. We added 3 units (to 15) and made some minor changes. These have increased our value by 75% through forced appreciation and buying it right. Along with the pay down of the loan, we have enough equity to refi cash-out and invest in additional properties while continuing to stabilize our current property through increased rents, utility billing back and additional units.

Question: Currently, we have an owner-financed loan at 4.6%/20 year 5/1 with a balloon 07/2022. We are approved for 6%/20 year, 5/1. With rates rising and being able to take cash out we would like to move now rather than in a year or two. We can take out about $175k, but that brings our cash flow to $0. This is out of the question. I have been trying to decide on the right mix of monthly cash flow and cash-out.

Does anyone have any experience they'd be willing to share? Thoughts? 

Thank you.

I want to cash flow $100-200 per door so I would take out however much cash that would still allow that.

Net annual cashflow after cashing out equals x% of your acquisition cost plus capital expenditures.  X will be determined by what ever return you're demanding.

@Shea Spinelli do you have a specific dollar amount for CF or do you want a specific return? 

If you want a specific CoC return @Justin Fox gave you an easy way to set a CF goal.

If it were me, I'd figure out my goal and throw the relevant data (rate, appraised value, LTV, Op Data ect) into excel and have a data table show me what my CF looked like under different circumstances (ie. varying combinations of LTV and desired return) Then, assuming I had its modeled out, I'd do the same for IRR.

That gives a good idea what type of impact every dollar of CF has on your return.

@Shea Spinelli can you pull what cash you've put into the property (DP, closing and improvements) and still +CF?

Take it all out. Every last penny. Use it to finance a new deal. Whatever you ‘lose’ from the first property, the second will more than make up for it.

Think of it this way; you will own a house for ZERO out of pocket. Who cares if it cashflows or not.

New property will cash flow and that cash flow is free money.

@Justin Fox yes, we can pull DP, improvements, last years reinvested CF to grow, closing costs and still cash flow $128/door. 

@Justin Fox thanks for the formula to analyze this. @Bill F. I’ll definitely re-create the spreadsheet I am using and incorporate @Justin Fox’s info and your recommendation to run differing scenarios. 

@Mike Verna I couldn’t do that. It would make me uncomfortable. The appreciation and rent increases here are 1-2% on average. It’s a consistent growing area without a lot of ups and downs. I primarily invest for CF. That’s why I’m stuck on how much to give up. 

@Shea Spinelli I would look for 100 a door and cash out the rest . I would not wait if it was me . Once the economy goes into “correction” mode lending and terms may not do so good ...so make hay while the sun shines and take action .

@Shea Spinelli - Why permanently give up any cashflow? If you're just looking to gain access to the cash so that you can buy a similar property, than you could just as easily get a line of credit and use it only when you need to. This way you get the benefit of the cashflow when you're not using the line and when you do use it you know that it's for a short period of time to help you acquire another property before doing the same thing with that one. 

@Dennis M. good point. I’ve considered that. Plus, money today is worthw more than money in the future. 

@James Masotti I tried to get a couple FI’s to attach a line of credit, but they didn’t like the secondary lien behind an owner financed loan. Which is odd, because a second position, is a second position. 

The reality is that if your equity is what is creating your positive cash flow you do not actually have any positive cash flow on the property. You are buying th ecash flow th eproperty itself is not capable of generating it on it's own.

If pulling 175K kills your cash flow th eproperty is not a good investment and I would be selling to free up your equity.

@Thomas S. I agree with what you’re saying as it pertains to purchasing cash flow and that’s why we’re going to cash out.

After cashing out we will still cash flow and have zero invested in the property. We just decided to max the cash out to a point where we will still cash flow $1500/month ($100/door). 

Unfortunately it is still only your cash that is generating your returns. Your equity has a earning ceiling equal to the prevailing mortgage interest rate. That is the maximum it can earn as dead equity. There are better vehicles that generate higher returns. 

I guess I’m stumped @thomas. I think I understand that because I’m not able to max out the cash out and still generate the minimum level of cash flow is why there is dead equity? Even though we increased the value through forced appreciation in the last year, any equity within the investment is producing the monthly return so it’s too much equity in correlation to such little cash flow...we will have to discuss selling it and crunch the numbers with the view you’ve given me.

This isn’t our first deal, so there is still a lot to learn.

@Thomas S. what if we maxed the cash out and CF $88/door? Then we could increase rents to increase CF. We are still a little below market. We have made so many changes, we were moving slowly to allow the tenants to adjust with us. 

I'm with Thomas sell it using a 1031 and reinvest in other opportunities. Personally I do not understand the $100/ door mentality and now your willing to settle for $88/ door? Risk is just way too high with such a minimal return. Couple of other thoughts are draw a 30 minute circle from your location and try to find other opportunities. If that does not work then increase it in 5 minute increments until you find other opportunities. if I am hearing you correctly cash flow is your # 1 objective. If that is the case then retrench and recreate using your current asset as leverage for better opportunities. Another way to look at is using Coke vs Netflix. Coke is a safe stable investment pays a decent dividend - Netflix was a high flyer with amazing returns. Currently you bought a Netflix turned into Coke and there it sits. Find another Netflix .

Best wishes

@Shea Spinelli I would want to know how much per month you will lose by the 1.6% interest increase? You are only gaining 1 extra year of term so it may not be worth it at all. What about a line of credit instead? 4.6% is a great rate 9n a commercial property so I'm not sure I would mess with that unless you could get a long term, fixed rate loan.

@Chris Youssi good analogy. I didn’t take into account what Thomas shared until now. CF is our primary goal, but to increase CF we wanted to purchase additional units. Currently, we CF $2750/month on the community as a whole. 

@Jason DiClemente originally, the main goal was to get our original investment, re-invested profits and any additional cash out so we could continue to buy. We were ok with the reduction in cash flow on the short term to put the equity to work elsewhere. I’m going back to re-calculate the numbers based the insight provided by everyone with more experience. 

Originally posted by @Jason DiClemente :
@Shea Spinelli I would want to know how much per month you will lose by the 1.6% interest increase? You are only gaining 1 extra year of term so it may not be worth it at all. What about a line of credit instead? 4.6% is a great rate 9n a commercial property so I'm not sure I would mess with that unless you could get a long term, fixed rate loan.

Cost of capital will be huge I bet.  The appraisal for a commercial property like this alone will probably be $3,000. That's whether the refi closes or not.  Most of my cashout refi's cost me 10%, but Ive only done a few.  I've moved more to a stop refying and pay them off model. Aligns well with my vigorous nap schedule. 

I've also never refi'd into a higher rate.  When paying off a seller who financed it, I always ask for an early payoff discount (usually 10%) about 3 years in as well.  Seller situations change all the time.  Without a discount I think you'll find the $9k ish in closing costs and the higher rate will make you wish you saved for your next purchase organically  5 or 10 yrs from now.

I'd wait a year or 2, ask the seller for a discount and save up for your next buy.  Do you have a specific property in mind, Shea?  

@Steve Vaughan we had the appraisal done through a different FI and they’re going to re-assign it to the FI we decide to borrow with. It was $2500, you’re right. I asked the seller for a discount a few weeks ago. He declined unless we wanted a steep discount and then gifted them so funds back to save them taxes.  

@Dennis M. That’s a good point. I too feel some pressure to take much action soon with the thought of rising rates.

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