Hi everyone I’m looking to do a cash out refi on my rental property so I can purchase another property. I am able to pull 45k out of the property but my interest rate is going to jump 1%. I’ll be losing $350 in cash flow due to the increased mortgage payments. Do you think this is too steep a price or worth it to keep momentum going?
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
4y
@Mark Aqua what's your alternative here? Meaning, if you don't take cash out...how would you be able to afford another property?
Right now property value is significantly outpacing rent. But rents will increase over the next several years. So you may not cash flow so much this year, but 3, 4, 5 years from now you will be much better.
And that other property that you will use that cash for - more cashflow! Add that on top.
But if you have a better alternative...then that's what we should do. Most of us do take cash out of our properties to buy more properties because there is no "plan b" that's better. Doing a cash out loan is tax free money. You are still borrowing BELOW the current rate of inflation - lots of reasons to do that.
It's just like if you were a business owner - hiring a new employee is an expense. But that employee should allow your company to make more money. What you are facing here is what all business owners face. And whatever you decide is right for you. No wrong answers here.
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
4y
@Mark Aqua what's your alternative here? Meaning, if you don't take cash out...how would you be able to afford another property?
Right now property value is significantly outpacing rent. But rents will increase over the next several years. So you may not cash flow so much this year, but 3, 4, 5 years from now you will be much better.
And that other property that you will use that cash for - more cashflow! Add that on top.
But if you have a better alternative...then that's what we should do. Most of us do take cash out of our properties to buy more properties because there is no "plan b" that's better. Doing a cash out loan is tax free money. You are still borrowing BELOW the current rate of inflation - lots of reasons to do that.
It's just like if you were a business owner - hiring a new employee is an expense. But that employee should allow your company to make more money. What you are facing here is what all business owners face. And whatever you decide is right for you. No wrong answers here.
@Mark Aqua what's your alternative here? Meaning, if you don't take cash out...how would you be able to afford another property?
Right now property value is significantly outpacing rent. But rents will increase over the next several years. So you may not cash flow so much this year, but 3, 4, 5 years from now you will be much better.
And that other property that you will use that cash for - more cashflow! Add that on top.
But if you have a better alternative...then that's what we should do. Most of us do take cash out of our properties to buy more properties because there is no "plan b" that's better. Doing a cash out loan is tax free money. You are still borrowing BELOW the current rate of inflation - lots of reasons to do that.
It's just like if you were a business owner - hiring a new employee is an expense. But that employee should allow your company to make more money. What you are facing here is what all business owners face. And whatever you decide is right for you. No wrong answers here.
Hope all of this helps. Thanks!
Plan B is saving up from my W-2 and the current cash flow... but that would take 2 years or so to make it happen. I was getting caught up on the overall cost of pulling the money out over 30 years.
But all good points about borrowing below inflation rates, rents should only go up over time, and most importantly the expense will allow me to grow.
Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
4y
@Mark Aqua sure as long as the property still cashflows after a cash out refi *and* your total net cashflow increases after acquiring your next property. Make sure you have reserves too.
Thanks for the feedback everyone! I’m very new at this so if you don’t mind I’ll share some specifics.
Two years ago I was looking for a single family and came across a duplex. Seemed like a good idea so I bought it. Currently living on one side and renting the other. Doing research to figure out landlording I found bigger pockets. Great info and made me want to invest more.
Purchased for 270k and got a loan for 235k @ 3.25% interest rate. The rental right now covers the entire mortgage. Between market increases and work I’ve done the property should appraise for 370k+. The principal is at 225k so my plan is to cash out refi pulling 45k out and refinance 277k at 4.375%. It will result in a 350 dollar increase to the mortgage.
End game is to purchase a beat up single family to live in and rent out the side I’m currently living in. Fix up the single family and cash out and repeat down the road. If both side were rented at current mortgage I would cash flow $950 a month including all expenses, capex, and maintenance. After the refi it would cash flow at $600.
Seems like a good investment to me. Am I on the right track? Thanks for the advice!
Purchased for 270k and got a loan for 235k @ 3.25% interest rate. The rental right now covers the entire mortgage. Between market increases and work I’ve done the property should appraise for 370k+. The principal is at 225k so my plan is to cash out refi pulling 45k out and refinance 277k at 4.375%. It will result in a 350 dollar increase to the mortgage. ...
What you're trying to get at is 'what is the weighted average capital cost of borrowing that 45K. Based on your numbers the 277K loan means your fees are ~7K which you're financing as well. So the math looks like this:
[(225,000*3.25%)+(52,000*9.25%)]/277,000 = 4.376%
So the real cost of borrowing that 45K if it is fully assigned to the 45K you receive is 9.25%. That tells me that I would not borrow these funds unless I had a much better project to pursue...or there was a non interest cost reason to do so. I'd likely pursue a HELOC even if it was 7% that would be a better option that the cash out refi.
Rental Property Investor · San Luis Obispo, CA · Member since 2020 · 12 posts · 3 votes
4y
Thank you @Mark Aqua for asking this. I'm in this same boat with similar numbers on cashback and interest rates. To piggy back on this, I'm trying to pull money out on a refi to have the money ready for my next purchase, which is not planned yet, without tapping into my reserves. Listening to the community for your advice, and thank y'all.
Rental Property Investor · Denver, CO · Member since 2021 · 63 posts · 36 votes
4y
@Mark Aqua thanks for posting. I have similar questions around cash out vs HELOC. @Matt Devincenzo, thank you for the breakdown. Very helpful discussion to have come across.
@Dave Skow I was planning to finance 277k and out of that getting 45k cash. I was steered away from a HELOC due to adjustable rates but will look into a home equity loan after this discussion.
@Matt Devincenzo This was exactly what I needed thank you!! I was running the numbers but was missing this key point which helps make the comparison so thanks again.
Yes the actual fees were 4k and 3k in escrow funding. I'll look into my other options and see how they compare. I'm leaning to a home equity loan depending on the terms.
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
4y
Personally I like a HELOC, you can draw and repay to minimize the interest cost between uses. Also HELOCs tend to have a lower interest rate since they float, so they aren't pricing in the risk of their rates increasing in the future. I'm not too concerned with the adjustable rate because 1) it only increases max 1% per year which means I have tim to find alternative options 2) I'm using it for specific projects that should be paid back within 1-2 years. So if rates do begin rising, I should be finding longer term fixed debt for that project and paying back the HELOC. So in my perspective the actual risk of the adjustable rate is minimal based upon how I use the funds.
Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes
4y
Mark - HELOC is definite better than a cash out refinance .......check out the options with your bank and maybe with smaller to mid size local credit unions and bank in the area of the property for heloc options ....the options will likely be pretty homogeneous