Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
No. Don't get hung up comparing percentages. They don't mean the same thing to the two things you're comparing...and they don't have the same impact.
My answer to the initial questions is NO. It doesn't matter what the percentages are. I would be paying for money that is doing nothing but costing me more money. I would much rather get it into another REI that incorporated a compounding strategy. This way, I would get multiple uses out of the same money, pay for it only once, and get a compounded return.
Now if I did as you suggested, not only would I be getting no use out of money that I am now paying for, but as it just sits there......I'm also losing that compounded return.
I think rates will probably be fairly low at least for the foreseeable future. I am getting 3.8% on 75% LTV for investment properties...so that is a fantastic rate. I'm still picking up properties that make sense but I'm going to use a few larger homes and my own home as a refi piggy bank in case the market tanks to the point of going "all in"
Good banks are paying 1.6-1.7% so you are looking about a 2% real cost to hold the cash if you do just have the cash sitting in the bank. Not terrible but I feel uneasy with large sums in the bank.
Real Estate Investor · Reno, NV · Member since 2016 · 71 posts · 67 votes
6y
@Eric X.
I was thinking the same thing but if market corrects,rates go up and it takes time to refi would have cash sitting in the bank not a better idea. Be ready to jump when the deal presented itself.
Investor · Bartlesville, OK · Member since 2019 · 21 posts · 16 votes
6y
I like the idea of cash-out refi's to take advantage of lower interest rates now if it fits into your overall strategy for those properties. I also like the idea of having some cash on-hand to take advantage of opportunities that may present themselves. Having the cash on-hand can be the difference between you securing the deal vs. someone else.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
No. Don't get hung up comparing percentages. They don't mean the same thing to the two things you're comparing...and they don't have the same impact.
My answer to the initial questions is NO. It doesn't matter what the percentages are. I would be paying for money that is doing nothing but costing me more money. I would much rather get it into another REI that incorporated a compounding strategy. This way, I would get multiple uses out of the same money, pay for it only once, and get a compounded return.
Now if I did as you suggested, not only would I be getting no use out of money that I am now paying for, but as it just sits there......I'm also losing that compounded return.
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
6y
@Eric X. open an account at Treasury Direct and invest in 4-week Treasury Notes. Absent a promo from a bank, your interest rate should be as high or higher than the best bank/CU rates, and one can argue that the US Treasury will be the last of all banks to go under, if that’s a concern of yours.
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
I've been asking people "if you're not willing to get equity out of your properties while rates are at an all time low, then what scenario are you waiting for?"
If you're property is 50% LTV or less, I think it's a no brainer. Even if you do not wish to buy more properties, letting equity sit in the properties in a very strong economy can be foolish. What happens if the RE market turns around in 9-12 months? Then your properties are worth 5-7% less and you missed your equity chance and you missed the low rates.
Rental Property Investor · Columbia, SC · Member since 2019 · 38 posts · 10 votes
6y
@Eric X. Who do you go to for a cash out refi? I have 2 properties and want to purchase more, but I'm having a hard time finding lenders. Can you point me in any direction?
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
6y
People have been posting on here since 2015 about waiting on a correction. I wouldn't make any investing decisions based on waiting for anything outside of my control. Personally, I don't like cash out refis for investment properties unless you already have something under contract to buy. Sure, there's the risk of rates going up. but you're paying interest from day one. What if you don't find an appropriate investment for six months or a year? A HELOC might have slightly higher rates, but the flexibility will be worth it 90% of the time.
Real Estate Investor · Reno, NV · Member since 2016 · 71 posts · 67 votes
6y
@Corby Goade
I get what you’re saying. It’s just so cheap right now. It hardly cost anything to have the money ready to deploy sitting the bank if I find a deal I could get with cash.
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Leverage equates to risk and return. It can be very powerful, it can also be risky if you do not have significant assets to manage a worse case scenario. So for those starting out in RE, there is no need to optimize return by going super high leverage. For those who have been in RE for a while, it is challenging to maintain a high leverage.
Especially in an appreciating market, return is magnified at high leverage. If a property goes up $50K that is the same $50K increase whether you have $50K equity or $250K equity but the return on investment is 5 times as great with the $50K of equity.
It is nice to have cash available for RE purchase when the opportunity presents itself.
FDIC bank accounts return are nothing. Stocks are risky and not liquid. Money market is not liquid enough (even 30 day). HELOCs maintain the low leverage.
High quality bonds through a large brokerage that offers low interest loan against the bond assets. OK return on the asset. Liquid. The goal is to have the money work for you and be available immediately. This recommendation is for those investors who have enough assets that they want to be in a position to go all cash on a deal this week. In my market that is $600K to $700K liquid. In most markets it is significantly less.
I understand a similar approach can be done with life insurance. I do not know the approach but there are people who recommend this route over the one that I suggested.
@Eric X. Who do you go to for a cash out refi? I have 2 properties and want to purchase more, but I'm having a hard time finding lenders. Can you point me in any direction?
what state are you in? My broker only does Illinois. However the banks she uses are Provident and UWM. They both have fairly high requirements in terms of LTV, credit, and income in order to qualify for the best rate/terms
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
6y
"Sitting in the bank" could at least sit in a CD or high interest savings account.
Nothing is worse than sitting on sidelines. I made that mistake and missed opportunities because I wasn't looking. I had an off market deal hit me in face and didn't realize it. A year later the neighbor listed the property and it sold.
I get what you’re saying. It’s just so cheap right now. It hardly cost anything to have the money ready to deploy sitting the bank if I find a deal I could get with cash.
Just keep in mind that the ability to deduct interest, follows use. So when you put cash in the bank from a refinance, that portion of the interest is not deductible on your rental property. So let's say you take out $100,000 cash and put it in the bank and you are paying 3.75% interest. That is $3750 per year you are spending to have cash ready and waiting and that $3750 is not deductible on your taxes. You can only start deducting the interest, when the money goes into a deal. I don't see the real estate market flipping over night to deals everywhere, but as a wise man once said, "future is difficult to predict, because it is always changing".
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
6y
@Dan H. are you suggesting taking equity out as cash, investing it in high quality bonds at a brokerage, then, borrowing from the brokerage against the bonds when the time is right to purchase more real estate? Trying to wrap my head around your post.... thanks.
I get what you’re saying. It’s just so cheap right now. It hardly cost anything to have the money ready to deploy sitting the bank if I find a deal I could get with cash.
Just keep in mind that the ability to deduct interest, follows use. So when you put cash in the bank from a refinance, that portion of the interest is not deductible on your rental property. So let's say you take out $100,000 cash and put it in the bank and you are paying 3.75% interest. That is $3750 per year you are spending to have cash ready and waiting and that $3750 is not deductible on your taxes. You can only start deducting the interest, when the money goes into a deal. I don't see the real estate market flipping over night to deals everywhere, but as a wise man once said, "future is difficult to predict, because it is always changing".
That's my understanding as well. What if one uses a HELOC initially? Then can you do a cash out refi scenario to get out of the HELOC? I'm guessing no.