A lot of investors I work with use refinance as a way to recycle capital. Some prefer cash-out refi, others restructure terms for cash flow. What’s been your approach — do you keep it simple, or mix in different strategies depending on the deal?
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
1y
Brandon,
Speaking from a Banker standpoint the most popular and cost efficient method to build your REI portfolio is a Cash Out Refinance. There are a several reasons to use a COR versus a Heloc for example is payment. In most cases especially now that mortgage rates are going to continue to drop. You get the option to lower a first rate and the mortgage is over 30 years versus a Heloc that typically is over 10 to 15 years.
Cah out over a 30 year is going to offer a lower payment and rate considering Heloc rates run above 8-10% and some Heloc's carry a interest only or prepayment penalties. That makes it harder to pay off faster or refinance to consolidate. If you are only taking out little repair or renovation costs a Heloc might be fine. Anything around $30K or more usually fits in the budget better under a COR.
A Cah out refinance also put liquid reserves/Cash into your hand or into checking/saving and can be used for PITI "reserves" or assets required by most banks/lender to buy more REI properties and a Heloc can NEVER be used as an asset or PITI reserves. That can make or break an approval in underwriting.
A Heloc is also unstable here even if you have (1) late payment on anything credit card, auto loan, student loan, mortgage even by error or mistake. The Bank or Lender holding the Heloc can reduce the heloc credit limit or even close it completely. That can ruin a build or renovation project or even down payment on another REI. I have seen this happen a lot over the last 5 years as credit get tougher and lender's try to prevent losses.
The ultimate project to be able to buy a TLC or "Ugly Inventory" put in a low to moderate amount of cash to renovate and hit it big on a high ARV. That allow you to pull out the initial capital, renovation costs and money for the next REI purchase, even raise the rents!
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
1y
@Brandon Lee
I'm a fan of cash out refis to harvest some equity to scale up for free. I've bought 14 rentals from doing 6 cash out refis in the 10 years I've been investing. I was able to buy these 14 rentals with zero out of pocket expenses. I've also done five 401k loans to use as down payments to buy houses. I've bought five or six houses with 0% interest for a year credit card loans up to 25k to buy houses. And I've used a HELOC to buy a couple rentals.
My wife wouldn’t let me use our savings to buy rentals, so I got the money by being a little creative. I paid off all these loans asap with the mailbox money. Then would repeat. So it’s all infinite cash flow since I’ve paid myself back all the money I’ve ever use to buy real estate. And the profits are around 21k/month, so I have no regrets about scaling up with equity just sitting there doing nothing for me or using short term loans to acquire more and more cash flowing rentals.