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.
Rental Property Investor · Richmond, VA · Member since 2018 · 9 posts · 2 votes
6y
@Joe Splitrock
Can’t the “use” be to provide liquidity while looking for deals for your business? Also I would assume you could consider at least a portion of it to as “cash reserves” for your other properties? Just a thought
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.
This is exactly what I just did. Closed a cash-out refi at 3.65%, put the cash in HYSA to park, and have been investigating 3 different markets and have made a couple offers. I want to both lock in the low rate, and have the cash ready to move. The the folks saying "wait till you need it" that is bogus, as it takes weeks to complete a refi. You could miss the target opportunity tomorrow. Then what do you do? If you're ready, go execute, and get your cash ready to go. I am pulling cash from all corners of my accounts to hoard in my HYSA "war chest" ready to move on at least one or two props rest of year. With the COVID scare, stock market crashing a bit (for any savvy long term investor, who cares, but regular folk get scared any time they see red), election causing uncertainly, it is inevitable that people will look to sell their extra property, and also likely scare away half the buyers. I think this is what you are prepping for OP, so am I.
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.
A lot of long term holders just don't care what the market does. A friend of mine had a few hundred properties through the crash & after and he just sat on everything and let all of his properties amortize. If you're renting, chances are rents aren't going to go down if you're doing things right.
Real Estate Agent · Ocean View, NJ · Member since 2015 · 76 posts · 25 votes
6y
@Franky Aikens I've been reading through this and I like what you said! Yeah, I wouldn't park the money for too long but I'd go out there and make a deal happen!
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
6y
@Andrew Blanks where would you claim the interest? There has to be an investment to claim it against. You can’t use the property you took the cash out of.
Rental Property Investor · Richmond, VA · Member since 2018 · 9 posts · 2 votes
6y
@Joe Splitrock
Not sure. Definitely not a CPA. figured you could claim it as a business expense. Similar to a home office, etc. not tied to a particular property, but to the overall business
Not sure. Definitely not a CPA. figured you could claim it as a business expense. Similar to a home office, etc. not tied to a particular property, but to the overall business
You are right that the cash out could be treated as business interest, but not deducted exclusively against the property you took the money out of. You would need to segregate the funds (separate bank account) and be able to prove qualified business use. Of course that is true even in the example of home office deduction, you need to prove regular and exclusive business use. For example, owning one rental house does not give you business justification for a home office deduction. There is no hard rule here, but you need to be able to prove to the IRS the business need of any expense.
This document does a pretty good job talking about tracing rules, probably better than me: