Refinancing and Leaving Equity

7 Replies

I just finished a successful BRRRR and refinanced the property at 65% of the appraisal. I have done this on a chunk of my properties and some are financed even lower than 65%. My bank would allow me to refinance up to 75%, but my current business plan dictates that I pull out only what I have into the property and leave the rest as equity. In my opinion this helps my portfolio stay a little more recessions proof, especially since the majority of my mortgages are a 5yr ARM. The higher equity also helps my net worth. However, I wanted to see what other opinions on this would be. I struggle with equity just being a imaginary number on my spreadsheets when I have the opportunity to put more cash in my pocket if I refinance at 75%. I know that I could use that extra money to get into more deals, but if I make that the standard for my business then I will start to have a portfolio and company that is leveraged at 75% instead of 65%. And that seems to be a bit of a riskier model. I want to make sure my company is around for the long run, but also don't want to miss out on opportunities to grow. What do you guys think?

You're leaving free money on the table.  How does leaving that equity higher help you in a recession?  Why would you take a 5 year arm anyway?  Seems to me you have this backwards.

1 - You're increasing your current cash flow with that arm (assumed...why else would you do it), but have you risk control in that last year to keep that payment low, and cash flow high.

2 - You are leaving free money locked in the closet (or wherever you are keeping the equity in each house) instead of taking it (and reusing it), and locking in that mortgage payment, and cash flow, for 30 years .  To me, this is how you hedge against a recession.

@Joe Villeneuve Thank you for your advice. I am using a 5 yr ARM because I have already used the 10 conventional loans available to me. I am all ears, if I'm missing something there. The idea of trying to prepare for a recession because I have less leverage on the properties is because when the 5 yr ARM expires in 5 yrs, and I go to refinance the home I will owe less and therefore be more prepared to handle a lower valuation of the property if that refinance happens to occur in a down market. Does that make sense? Or in your opinion am I missing the boat there.

Originally posted by @Justin Sheley :

@Joe Villeneuve Thank you for your advice. I am using a 5 yr ARM because I have already used the 10 conventional loans available to me. I am all ears, if I'm missing something there. The idea of trying to prepare for a recession because I have less leverage on the properties is because when the 5 yr ARM expires in 5 yrs, and I go to refinance the home I will owe less and therefore be more prepared to handle a lower valuation of the property if that refinance happens to occur in a down market. Does that make sense? Or in your opinion am I missing the boat there.

It depends on the actual numbers. All I know is you have 10 mortgages already...and you're finding out one of the big, make that huge, problems when using the BRRRR method. It has limits, and when you reach those limits, you've actually putting yourself in a bad position.

The Brrrr Method can be a good one, but not used this way.  I still use it, but I use it at the end of a string of deals, not at the beginning.

The problem I have with what you've done, is you are stepping over a pile of dollars to pick up a dime.  You're focused on "what might happen if" in 5 years, instead of what you could be doing "in those" same 5 years.  What you could be doing is using that extra cash from the refi over and over to build your cash position high enough to cover both the "what might happen", and "what could be done within" that 5 year mark.

See, I'm all in favor of "risk controls"...I won't leave home without them.  However, in your case, you think you are establishing a risk control, but you're not.  You may (or may not) be limiting your risk exposure, but you are not doing anything to "control that exposure".  Investing from fear is not taking full advantage of what you are presented with.

I agree with above in regards to dead equity. It is costing you a fortune in lost income. Every 100K is cost you 10% or $833/month.

Additionally if there is a recession you lose it all, not a good financial plan. If you do not want to pull it out to reinvest in real state then pull it out and invest in some other vehicle that will not be effected by a real estate drop. If your real estate drops in value you are then only losing OPM. 

Do something to make it earn it's keep rather than having dead equity sitting waiting to be lost. 

Equity is always at risk in real state and costing you a fortune in lost opportunity.

Howdy @Justin Sheley

You could group several properties together and refinance them using a portfolio lender.  That would free up your ability to use another conventional loan or two.  As you reach your max of 10 loans, just, do another portfolio group loan.

Alternatively, put several together and start upgrading to bigger properties using 1031 exchanges.

Either method would free up conventional loans for you.

@Joe Villeneuve Thank you so much for your insight, definitely has me thinking this over long and hard. @Thomas S. I like your idea about possibly pulling out that extra equity and even diversifying with that money. Although it would be hard for me not to just dump it straight back into real estate, still a very intriguing thought.

Originally posted by @Justin Sheley :

@Joe Villeneuve Thank you so much for your insight, definitely has me thinking this over long and hard. @Thomas S. I like your idea about possibly pulling out that extra equity and even diversifying with that money. Although it would be hard for me not to just dump it straight back into real estate, still a very intriguing thought.

 Diversify within real estate.  There are very few other investments where you can invest using free money, quickly, and profitably. 

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