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.
Highest and best use of equity is what you should be targeting. If sitting in a savings account at 2% is it, then proceed.. I highly doubt that is the case. Don’t stick it in a mattress either. Make your money work hard, when transferring it from one asset to another returns more all you need to do is decide if it’s enough of an increase to be worth the hassle. I won’t do 5 hours of paperwork for an extra $5/ month for example.
I can get 2.6% on my primary and 4.6% on my investment properties. I was think doing a cash out refi on primary or get a mortgage on my investments. Put the money in a high yield investment account making 1.6% till I could find a good deal. I am always looking. Just thought might be good to have cash on hand when the deal presents itself.
If I understand correctly you just suggested getting a loan at 2.6% to earn 1.6% in the interim before earning ___% at a date to be determined in the future?
If so, no, I would not do this unless you expect your access to this money will become more difficult for some reason (employment change for example).
Cash on hand is always valuable. It provides options. Just depends on your timeline really. Borrow now to write offers in June? No thanks. Borrow now and start writing offers next week? Maybe. HELOC would be a preferred option here if you can get it. Saves interim interest charges.
@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.
Correct but the source of the funds in not critical. If you have extra equity in an RE, then a refi to put the money to work could be beneficial. The higher leverage on the RE provides better return potential. The ability to close quickly with cash can provide purchase opportunities. The bonds have their growth when the money is not being used.
The goal is to obtain top return. Top return is obtained by having every dollar providing return without losing opportunities due to not having quick cash.
@Tj M. I’d go with the refi. But I wouldn’t sit on the money waiting for home prices to correct in the market. Instead, I’d go out and create a deal that gives me the same result a market correction would.
Parking your money to wait on a deal to show up is like taking your best players out of a game to wait for the other team to get tired before you put your players back in. What if the other takes longer than expected to get tired? Or worse, what if they never get tired at all?!
I’ve been educating myself on investing for a while now. One of many things I’ve learned is that most successful investors don’t sit on cash. They move it to deals that throw off an acceptable return for their money. They find a way to do this in any type of market condition.
Thanks for asking this question, I have been considering the same question.
I am going to refinance either anyway because of the rate drops.
For a buy and hold strategy it just seems simpler to just do the cash out now while rates are really low than having to deal with going through the heloc and refinance later. I am also leaning towards the cash out now because I am looking towards doing new milti-family construction, and I don’t really want the risk of a heloc for the year or so while the construction takes place.
Curious why the mortgage interest wouldn’t be deductible? Say you own rental property free and clear, you have zero mortgage interest deduction.
Then take a cash out refi in property and now have mortgage interest to take a deduction? Am I missing something?
Because deductibility of loan interest follows use of the money, not what asset the loan is secured against. For example if you take out a HELOC on your personal residence, but use the money to buy rental property. The interest is deductible against the rental property.
If it is a refinance, you can deduct the interest portion of a cash out refinance that is used to satisfy the original loan. As far as the portion above the original loan, whether it is deductive depends on use of the money. The interest on the cash out portion is deducted where it is used. The rental property is securing the loan but you allocate interest based on where the money is used.
Think about it logically, why would you be able to take a cash out refinance, then use the cash to take a vacation or some other personal expense, only to claim the interest as a business expense?
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.
If you buy the property on a HELOC, then take out a loan to pay off the HELOC, that is considered refinancing. The HELOC interest (even if secured against your primary residence) would be deductible against the rental property. Then when you repay the HELOC, the interest from the new loan would be deductible up to the HELOC amount. If you are walking away with cash from the deal, the interest on that portion of the loan is only deductible if the cash is used on another investment property.
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.
If you buy the property on a HELOC, then take out a loan to pay off the HELOC, that is considered refinancing. The HELOC interest (even if secured against your primary residence) would be deductible against the rental property. Then when you repay the HELOC, the interest from the new loan would be deductible up to the HELOC amount. If you are walking away with cash from the deal, the interest on that portion of the loan is only deductible if the cash is used on another investment property.
Right, so I'd have the HELOC ready and waiting but since I'm not using it I am not paying anything on it. Then when I buy a new property with it, I cash out refinance one of my other rentals and pay off the HELOC. This way I avoid the higher rate of the HELOC and not being able to deduct the interest of the cash out refinance until I buy another property, etc. Get what I'm saying? Never thought a HELOC would actually come in handy.
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.
If you buy the property on a HELOC, then take out a loan to pay off the HELOC, that is considered refinancing. The HELOC interest (even if secured against your primary residence) would be deductible against the rental property. Then when you repay the HELOC, the interest from the new loan would be deductible up to the HELOC amount. If you are walking away with cash from the deal, the interest on that portion of the loan is only deductible if the cash is used on another investment property.
Right, so I'd have the HELOC ready and waiting but since I'm not using it I am not paying anything on it. Then when I buy a new property with it, I cash out refinance one of my other rentals and pay off the HELOC. This way I avoid the higher rate of the HELOC and not being able to deduct the interest of the cash out refinance until I buy another property, etc. Get what I'm saying? Never thought a HELOC would actually come in handy.
Sounds right, as long as the loan is used for rental activity, there is no issue claiming interest. Paying off the HELOC is not receiving cash. I know you know that, just clarifying why this works.
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.
If you buy the property on a HELOC, then take out a loan to pay off the HELOC, that is considered refinancing. The HELOC interest (even if secured against your primary residence) would be deductible against the rental property. Then when you repay the HELOC, the interest from the new loan would be deductible up to the HELOC amount. If you are walking away with cash from the deal, the interest on that portion of the loan is only deductible if the cash is used on another investment property.
Right, so I'd have the HELOC ready and waiting but since I'm not using it I am not paying anything on it. Then when I buy a new property with it, I cash out refinance one of my other rentals and pay off the HELOC. This way I avoid the higher rate of the HELOC and not being able to deduct the interest of the cash out refinance until I buy another property, etc. Get what I'm saying? Never thought a HELOC would actually come in handy.
Sounds right, as long as the loan is used for rental activity, there is no issue claiming interest. Paying off the HELOC is not receiving cash. I know you know that, just clarifying why this works.
Thanks Joe, appreciate ya! As a newly minted realtor I am leaning toward using cash out refinances to take 50% equity positions out of a few of my rentals to buy more properties and leave my nearly 1 mil cash reserves on hand for other opportunities; index funds, huge dips in the real estate market (which I am not expecting based on my research) at least not any time soon.
I recently did a cash out refinance on one of my properties. With that money, I bought 3 more cash-flowing properties in a span of 4 months. Don't let your money sit idle. If you're going to get a cash-out refinance, be prepared to start reinvesting it as quickly as possible. As one person stated, maybe have an accepted offer before going through the cash out refinance.
While you are waiting for the market to correct, other people are making deals. Not every deal is going to be a slam dunk, but the longer you wait, the more opportunities you are missing out on. I think it's smart that you are looking in other locations for better deals.
Many investors are dreaming of a market tanking like it did back at the end of the last decade, I think ur wasting ur time that is a not gonna happen. You have to adjust to the new conditions of the market, prices are high but rates are low be creative.