Cash out refi to buy rental property?

28 Replies

I’m looking at a property in my neighborhood that is turnkey and just dropped down to $115k. I don’t have cash for a 20% down payment, but I was considering doing a cash out refi on my first home (which is already a rental property.) I don’t know much about cash-out refi’s, so let me explain what I think I want to to do, and you all can tell me how misguided I am! Haha

I owe $80k out of the original purchase price of $92k on my first house, but I think I could easily refi for $110k-$120k. The result would hopefully give me enough cash in hand to put 20% on the new property and cover closing costs. Would this be a good way to acquire my 2nd rental?

I appreciate any feedback!

I am not a banker or mortgage lender but from my experience of looking at this same scenario i would say the numbers probably won’t work for you.  When you refinance the best you could do would be to refinance at 80% of the current value  Most of the mortgage brokers I have been talking to require 30% down on an investment property and also @ 6-7% interest.  A better scenario would be a heloc if your bank would do one since the property you are borrowing against is a rental.   Not sure if you are old enough to remember the housing bubble bursting about 12 years ago but a lot of millionaire investers moved into the poor house   My advise to you is to tread water until you save enough to purchase a second rental and not put your other house at risk 

@Fred Cannon Thanks for the reply!

By "current value" would that be the market value based on comps in my area? Or how would that be determined? The median sell price of homes in my area has shot up quite a bit in the last 3.5 years since I bought that house. Does the bank send out an appraiser to determine how much they would allow me to refi for?

I need to do more research on helocs, but since I don't have a ton of equity in that house, I assume I wouldn't get much out of a heloc, but maybe you can help me understand what that would look like? (Purchase price was 92k, I put 5% down, so loan amount was $87,400. I still owe right around $80k. BUT when I bought the house the appraisal came back at $100k. Not sure if that is a factor or not.) Thanks so much for the help!

To refinance a house is quite expensive with all the fees the new 30 year mortgage and most likely a higher interest rate than you are currently paying.  To me it’s close to being a con game especially if you don’t have a lot of equity.  

Buying real estate for investment purposes is almost an addiction to some people.  Just like a junkie robbing someone to get that next high investors will rob from themselves to make that next purchase.  Don’t go crazy trying to figure out how to make that next purchase.  There will be a good deal out there for you if you save up the money to put down. Not only that but you will sleep better at night.  I’m just a small investor with six property rentals ( only one with a mortgage.   I have three properties that will be empty by the end of July.  Even though I don’t loose much out of pocket money when they are empty it’s stressful.  

@Taylor White

For a cash out refinance on an investment property a SFR is an LTV of 75% and a MFR is an LTV of 70%. This isn't going to leave you with enough for the down payment.

For a SFR purchase you are required to put down at least 15% and a MFR is 25% down for an investment property. There is also a reserve requirement. Do you have stocks, bonds retirement funds, or a life insurance policy with cash value?

Do you have a primary residence that you could get a HELOC out on for the down payment?

@Fred Cannon I appreciate the advice! I do want to be wise and make good investments that make sense on paper. I’m also just trying to set some good goals and take action, so I want to do my best to know all of my options for raising capital instead of just waiting (possibly several years) until I can save enough for a 20% down payment. I can’t wait to be where you’re at with paid off rental properties!

@Jerry Padilla thanks Jerry, I can’t do a heloc on my primary residence because I just bought it 6 months ago. That’s why I wanted to look more into the options for my first house, which is now a rental. I do have some equity in that house which I could maybe pull out with a heloc

@Taylor White in one of your first posts you said you don't have enough equity for a HELOC. Not sure if there's something I'm misunderstanding, but if you have the equity for a refi then you have the equity for a HELOC as they are both based on appraised value.

It depends what you want to do with the second property. Are you planning to BRRRR and pull your cash back out? Or just make it a straight buy and hold?

If the former, a HELOC may be a better route (depending on the lender) because you avoid closing costs and other costly fees that make a refi expensive. You also don't affect your principal payments on your house, so you don't hurt your cash flow. The downside is you're going to have higher interest rates and a shorter term, which is why it would only work if you plan to refi out of it in the new house.

If the latter (which i assume since you said turnkey), look at COCROI of each property to determine if the refi is a good option. The refi will have the previously mentioned costs, and subsequently raise your payments on your current house (diminishing cash flow). If you can make better use of that cash for a greater total cash on cash return, it might be worth it. But since you only put 5% down and don’t have much in the first house to start with, it doesn’t seem like that would necessarily be the best either.

If the other deal is too good to pass up, maybe look at a partnership with someone who can afford to help you out. You may only get a percentage, but if it’s that good of a deal it’s better than nothing.

Thanks @Patrick Menefee !

I was unaware that helocs were based on appraised value! That's really helpful to know. This new house would just be a straight buy and hold.

I do want to look into doing a partnership and I know a few people with capital who would be interested. I just need to look more into what the parameters of a partnership would look like for me.

My experience is that you will only be able to take the loan to value (LTV) to 75% on a cash out refinance on an investment property. Meaning that if you think the property is worth 120k, the loan would be a max of 90k or $10k cash out in your example (plus there would be closing costs). You would then need a 20-25% downpayment on your next purchase, but maybe you could get creative and do seller financing or something with less money down. Or if it's a great deal maybe pay it forward and pass along to another investor to create goodwill if you aren't able to make it happen financially. 

Originally posted by @Taylor White :

I’m looking at a property in my neighborhood that is turnkey and just dropped down to $115k. I don’t have cash for a 20% down payment, but I was considering doing a cash out refi on my first home (which is already a rental property.) I don’t know much about cash-out refi’s, so let me explain what I think I want to to do, and you all can tell me how misguided I am! Haha

I owe $80k out of the original purchase price of $92k on my first house, but I think I could easily refi for $110k-$120k. The result would hopefully give me enough cash in hand to put 20% on the new property and cover closing costs. Would this be a good way to acquire my 2nd rental?

I appreciate any feedback!

I'm late to the thread so it's probably been answered already, but- run the numbers. How much interest would you be paying on the cash-out versus how much you'll be earning on the rental property? If the rental property isn't giving you more than the interest on the loan, it's not doing you a lot of good.

Hey @Ali Boone , over the past few days I've been looking at HELOCs instead of the cash out refi. Penfed supposedly offers 80% LTV at 6.5% for non-owner occupied properties. If my house appraise for $125k, then 80% would be $100k minus the 80 that I owe would give me $20k.

The down payment on the new house would be $23k + CC. I could probably come up with a creative way to get the extra $6-7k. From what I can tell my HELOC payment would be less than $150/month and my cash flow on the property would be around $3-400. So I think it makes sense on paper as long as there is no huge expense right out of the gate, like needing a new roof or HVAC.

Does all of my math check out?

Thanks for the help!

If you're going to max out your borrowing on your first house, just to put 20k or so down on another, does that mean you don't have any other savings? If so, that is not a healthy situation for a guy who owns rentals. Debt is fine, but not having a pot of money to cover contingencies is not. That is how people get caught in a crunch and go broke. 

Thanks Pete, I do have some money saved as an emergency fund (around $5k), but I agree that I probably need to have some more wiggle room. I guess in this case, maybe I would partner with someone so that I wouldn't need to max out the HELOC. Or I'll just slow down and get myself ready for my first BRRRR. Thanks for the advice!

Originally posted by @Taylor White :

Hey @Ali Boone, over the past few days I've been looking at HELOCs instead of the cash out refi. Penfed supposedly offers 80% LTV at 6.5% for non-owner occupied properties. If my house appraise for $125k, then 80% would be $100k minus the 80 that I owe would give me $20k.

The down payment on the new house would be $23k + CC. I could probably come up with a creative way to get the extra $6-7k. From what I can tell my HELOC payment would be less than $150/month and my cash flow on the property would be around $3-400. So I think it makes sense on paper as long as there is no huge expense right out of the gate, like needing a new roof or HVAC.

Does all of my math check out?

Thanks for the help!

I guess. :) Not sure, just because it would take me some time to crunch all that. But why not the cash-out refi? Seems like you could get a lower interest rate on that than 6.5%. No?

@Ali Boone you’re right, I probably could get a lower rate with the cash out refi, but I would also lose money on the front end by having to pay closing costs again. Also my current rate on that house is 3.85% so a refi would probably leave me with a higher rate. I’d rather have a 6.5% rate on the 20k than a 4.5% on my entire mortgage.

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