Cash flow after cash out refi?

5 Replies

Hey BPers,

I have heard or read countless investors say on podcasts and forum posts that they cash out, refinanced to pull out the equity to purchase another deal. My question is once someone does the refi are they typically expecting to still cash flow on the property refinanced or is it typically a non cash flow mortgage pay down equity strategy. The reason I ask is that I have a property that is a good candidate for a cash out refi strategy but would barely make the 1% rule after the refi and have heard that's on the edge of cash flowing pennies, breaking even, or cash flowing negatively. Do most of the investors I hear on the BP continue to cash flow after the refi or what? Appreciative of your time in answering this post.

Thanks, Devin

Definitely still cash flow after doing a refinance, otherwise there would be little point in going forward. The goal is to have a multiplier effect by having multiple properties cash flow.

Example: I have a free & clear unit that cash flows $550 after taxes/insurance/maintenance. I pull $40k from that unit, plus some cash on hand, buy another unit free & clear that cash flows $550 after taxes/insurance/maintenance. The first unit now only cash flows $400 because there is $150 worth of note service on that unit, but combined the two units cash flow $950. 

You can play with the numbers at any level you want. If a unit barely cash flows at $200 or less, it is probably not a good candidate to cash out unless it's in a rapidly appreciating area OR you have a lot of equity in the unit and can purchase one or more higher cash-flowing units elsewhere, i.e. it can make sense to have that unit zero out if the cash withdrawal results in a significant cash flow increase elsewhere.

All of this has to be balanced against your total portfolio risk. If everything you have is leveraged to the hilt and you have little in the way of liquidity, you are walking a fine line between prosperity and disaster. If you have a couple of units clear, or major levels of liquidity to cover loss of income (I'm talking more than 1 year of income loss), you can probably still make it work. 

I am going to cash out a property of mine soon...Before I even considered discussing it with my lender, I checked to make sure I would still make income on the property...If you are going to go Cash Flow -, Personally  I wouldn't do it, it doesn't make sense.  This is your property however and your goals may be very different from mine...My personal goal is to make a dollar amount per door based on the price of the property and if it won't bring me that, then its not worth it or my time.

Thanks for the insight guys. My thought was to take a cash out refi, add to other funds and start a system of doing a flip-to-flip-to-flip strategy then aquire a buy and hold. That would be the ideal system at this time while keeping my full time job for living expenses. The purpose of keeping the refi property rather than selling to get the funds for 1st flip would simply principal pay down equity position which is a slow process but if it's $110 a month principal payment I could realize $2600 in 2 years if I sell off property, correct?

I am getting ready for my second cash-out refinance in a couple of months, and I aim to about break even. However, I have a couple of caveats to go with that:

  • I'm located in CA, so appreciation on SFR most often has to be a consideration.
  • I'm invested in an up and coming area. This creates a higher likely hood of more appreciation, as the properties are still priced significantly below adjacent neighborhoods.
  • I do plan on selling the properties in a couple of years, since the ROI isn't great, and just keeps getting lower the more equity appreciates.
  • I keep an emergency fund if something comes up.
  • I'm still small enough that I can cover losses from the day job in a worse case scenario.
  • I recongnize that this is high risk/reward strategy that isn't sustatinable in the long term.

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