Cash out refi advice?

Question

Hello everyone, hope you all are staying safe and in good health.

I need some advice regarding a cash out refi.

So I currently own a 4-plex in Phoenix and currently have a loan balance of $295k. My current rate is at 5.75%, therefore looking into a refi since it seems like the right time. A similar but smaller square foot 4-plex just sold about half a block away for $575k. So based on that comparable I should be able to pull out some equity.

My question to you all is, considering we are and( I’m assuming) we are in a recession. Should I just refi or should I do a cash out now and hold on for any potential deals in the future? The reason for the question is cause I’m not sure if this money will be taxed? Or should I wait to pull out cash later but may lose some of the equity if properties drop?

I think I might have answered my last one but would still appreciate any advice from some of you out there that have some experience in what I have just described. Thank you all in advance.

Zach Wain · Answer

@Rick Trevizo - mortgage guidelines are changing daily, and a lot of lenders just announced new price hits towards cash out loans this week.  Why?  Because Fannie Mae will not purchase cash out refi loans that go into forbearance.  Forbearance is causing interest rates to be much higher than they would be otherwise.

That being said, a cash out 4plex rental refinance has some of the largest price hits out there.  Rental pricing is not quite as good as it would normally be compared to where primary purchase rates are.  I will PM you.  Feel free to reach out for quotes or pricing info.  I run a mortgage company in AZ, but have been lending in CA for the past 15 years.

Guifre Mora · Answer

@Rick Trevizo You will not have to pay income taxes on the money you receive through a cash-out refinance, because the money does not count as “income.” It’s debt.

Cory Carlson · Answer

If you send me some needed details I will do an analysis for you and post it here. If i can get all these details, this helps with the quality of my analysis otherwise i'll estimate.

1. Income: monthly scheduled rents and other income (parking, laundry, RUBS, etc)

2. Expense load breakdown: taxes, insurance, management, repair/maint/turnover, etc

3. Depreciation amount: Found on your most recent tax return. Some items in your units depreciate faster than 27.5 years, such as appliances so this could be higher in the earlier years of ownership.

4. Effective tax rate

5. Other: When was your loan originated, current value of the building, price you paid and how long have you owned it?

I can measure what your projected 2020 returns will be with your current position and compare what your return on invested equity would be if you did a cash out refinance at X% Loan-to-value with todays rates. The take-away would be while your cashflow in dollars could be less than current, but your return on your invested equity (which is less after the refinance) and you can determine if your cash is working harder for you in opportunities in your market.

Rick Trevizo · Answer

@Paul Shannon

Thank you Paul. I appreciate the advice. I will definitely look into it.

Paul Shannon · Answer

I've done a number of cash-out refis and there is no tax liability for refinancing.  However, as mentioned by a few others, lender underwriting guidelines have changed, and continue to change quickly as the pandemic situation evolves.  My primary go-to lender for cash-out refis put a hold on lending for the time being.  I'd call around to see where things are with your contacts.

Rick Trevizo · Answer

@Ray Johnson

Thanks for the insight.

Rick Trevizo · Answer

@Evan Polaski

Thanks for the reply. I appreciate it

Ray Johnson · Answer

@Rick Trevizo I think you may want to do the Cash-out refi ASAP. Some of the Banks have already stopped accepting applications for HELOCs, Cash-out Refi loans will be next to get halted, or the 80% LTV refi loans will go away, and we will be seeing 70% or less.

Evan Polaski · Answer

@Rick Trevizo, confirm with your accountant, but cash out refi proceeds are typically not taxed.  If you do go through, and as mentioned, rates are very low, expect a very conservative appraisal.  If you are going with a commercial lender (maybe because property is in LLC), expect very conservative leverage too.  One of my lenders went from 75% LTV down to 65% now.  But mostly, since there is no arms length transaction, I have really had to work the appraisers and lenders to get a value I was okay with.

Rick Trevizo · Answer

@Erik Hatch

Thank you Erik.

Cash out refi advice?

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