how often or soon after closing do you cash out refinance?

Question

1.if you buy rentals at a bit of a discount, and there is equity in it when you get it, how long do you wait from purchase before you refi to take the money (to buy other properties)

2.rule of thumb how long in between standard cash out refinances, 5 yrs, 7yrs, play it by ear?

Ryan Arth · Answer

the properties all cash flowed at purchase.  the most i would cashout on a property would be either 1.the most the bank would allow (leave 10% in or whatever they need) 2.to the point where it just breaks even.

all cashout would be used as DP on next properties.

i am not looking to do this right now, as i have just picked them up.  i was looking for the advice for scheduling and planning for expansion for the future.

Michael Rossi · Answer

If you buy at a "bit of a discount", the property will not cash flow and you will lose money each and every month.  Refinancing will only increase the loss!

If you buy at a BIG discount, you might have a $100 per unit per month positive cash flow.  When you cash-out refi, you simply turn a positive cash flow property into a loser!  Why shoot yourself in the foot?

Mike

Ryan Arth · Answer

i thank you all for the advice.

sometimes you get so entrenched in a way of thinking that you miss the obvious answer.

"many houses, no cash"

in my area (cleveland) appreciation is generally not more than inflation.  so why would i want to stack 20 houses that make no money, if they arent going to be appreciating very much.

i thought that this was the only way to get more houses on a consistent basis on my income, but there are other ways.

thank you, you all make a difference.

Account Closed · Answer

Real estate in many markets can make a person rich on paper but VERY cash poor. The alternative is to have even more equity so that there is more free cash flow (cash income to the investor after all expenses including debt service).

If you keep pulling out equity to buy more you are raising the portfolio size but you may be standing still when it comes to a sustainable income.

Some folks will build a portfolio that covers itself while they continue to work full time. After a certain point they will sell approximately 1/2, pay off the remaining debt and then leave their day job as they now have real spendable income to live on. You do have to pay the taxes on the gains with this model. There are variations but most all involve reducing the debt to extra cash flow.

John Corey

Ryan Arth · Answer

my holding period should be considered indefinite.

MikeOH, what is your opinion on what one should do to be able to continue to expand, rather than relying solely on paycheck savings?

i am trying to learn from all of your here, and model my actions after your trial and errors.

allcash, i appreciate the logic involved in your approach, but i feel that the time it would take me to even pay off my smallest loan would be at least 3 years.  and that is with me continuing to save 70-80% of my net income.

Ken Hicks · Answer

How much does it cost to refinance? 
How long will it take to make that money back? 
You do the math to see if that would work out.

you could do a line of credit. Lenders might lend up to 90% of a drive by appraisal for free, but it's at prime which I'm sure is around 8.25%, and you will get a penalty if you pay close the equity line out with in X amount of months or years usually $400 or so. You can pay it off in a month and be fine you just can't close it out. What I did was purchase a property cash with my equity, repaired it rent it out for 3 months then got a HELOC on that rental and I was still able to take an extra $3k out to put into my rental fund savings account. Some banks won't do that much, the ladies at mine love me. I think  :roll:  that was just a way to get my property funded but you have to use a higher rate about prime. Yes you can fix the rate for 20 years. I also am set up with automatic payments and I get .25% of my interest rate. Just my say..

Michael Rossi · Answer

Almost every property that is refinanced to 90% of market value will result in negative cash flow, so that just won't be possible.   If you refinanced to a break even cash flow so that you would have money for the next property, then you would end up with a bunch of properties with no money.  I don't know about you, but I'm not doing this because I love meeting new tenants.  If you don't make money, then what's the point of running a rental property business.

There are many ways to continue expanding your portfolio.  You can buy properties with owner financing, sub-to, or on lease-option.  Additionally, you can buy the properties at a BIG enough discount that the bank will  finance the entire purchase price.

What I wouldn't do is end up with a bunch of properties that aren't generating any cash!

Mike

Scott Miller · Answer

The answers to your questions can be answered by knowing your intent and holding period...

1.  Do you intend to hold the property for any considerable time after the refinance (if your intentions are to sell the property, cashing out your position comes at a price---closing costs)?  Cashing out your position prior to selling only makes sense when you are improving your cash flow and cash out refinances rarely accomplish this).  
2.  How long do you intend to hold the property after the refinance?  AllCash highlights a very valid math rationalization.  Here is the formula I use to determine what I call the "payback" period.  I'll use round numbers to keep things simple---let's assume the following:

- You borrow 100,000 at 9% yielding a PI payment of 815.01.  
- You then do a cash out refi for 110,000 at 7% yielding a PI payment of 747.42.  
- The closing costs associated with the cash out refinance are 10,000

Using the following formula will determine how many years/months it will take you to reach the "payback" period:

Closing Costs / (Old Payment - New Payment) = # of months to breakeven

In the example above, it would take approx. 148 months for you to reach the breakeven point.

Of course, there are always exceptions to the rules---for example, if you can get a greater return on your investment by deploying the equity elsewhere or if the cash out refinance will be dedicated to improvements/efficiencies meant to improve cash flow---these are just two circumstances were your thought process could make sense.

Beyond the math, you need to contend with the realities of lending guidelines---title seasoning issues and or chain of title to be specific.

Regards,

Scott Miller

Greg` D · Answer

I do agree in principal with all cash, but, in the beginning when you have no cash to pay off your loans, I think it is ok to refiance in order to pull out more money to purchace another property.  How else will you be able to build up equity. Do keep trying to pay off your mortgage faster, to reduce the time. But don't refiance your newly purchased house if you cant afford the payments or if you are not collecting enough rent at this time to equal the payments you have to make.

Just my 2 cents

Frank Adams · Answer

striveforthelife; As your honorary "dutch uncle" I feel an obligation to caution you against doing what you're proposing. And I would like you to think long and hard about your answer to the following question:

Why do you think cash out refinancing is such a great source of funds?

I think it is a terrible waste of money, here's why.

Assume a world with no "real" inflation of RE prices. That means that RE prices are not rising faster than the general rate of inflation. In much of the country, over most time periods this has been true. I, and many others think that this is going to remain true for at least the short term-say 5 years.

For leverage to work in your favor, the investment has to appreciate at a rate greater than the cost of funds-your interest. See the above paragraph.

If you borrow $100K @ 7% on a 30 year amortization, it will take you 93 months, almost 8 years to pay down $10K of that loan. And you will have paid $52K in interest.

Now, here's another bad part of pulling cash out. These loans are all front loaded, that is the interest is much higher in the early years than in later years.

IMO, paying interest is a sucker's game. I know, I know, the interest is tax deductible, whoopie f'ing do! For every dollar you pay the bank, you get to save a quarter. Guess what, for every dollar you donate to the Boy Scouts you get to save a quarter, and they'll probably do better things with the dollar. At least they wont' give the money to politicians.

About 20 years ago I sat down and looked hard at the mortgages* I was carrying and realized there was a better way. I started "debt snowballing" the mortgages and retired them all within about 7 years of starting. Since then I've only purchased for cash (hence the screenname) and it is a wonderful negotiating tool.

This was somewhat prompted by purchasing a "low dollar" house for cash and then comparing that experience with the last mortgage I had taken out. The junk fees** on the morgage were about $3K, versus those on the cash purchase-exactly $0.0, and the time spent at the closing table was 45 minutes versus 90 seconds.

I know there are many on this site who disagree with my method, particularly the part about when leverage works and the value of the (totally illusory) "tax benefit". That's fine, we can disagree on methods, but agree on our goals and working with whatever makes us comfortable.

*12 or 13 at the time, in the ensuing 7 years I purchased 3 more for cash.

**Fees for which you receive nothing, no reduction in interest rate, no reduction in principle. It's any fee for which you can't point to a physical thing and say, "I paid for that, and it has value to me".

all cash