Cash out refi on investment property.

7 Replies

Right now I own 12 single family homes in the Cleveland market all financed between 4-5% with most of them on a 30 year term and 2 of them on 20.... All of them cash flow between $200-$450/ month.

With my current business income I am able to purchase about 3 properties a year. Because I am young (27) and have time on my side - I feel pulling some equity out to accelerate my business might be a good way to go.

I know everyone has different levels of risk tolerance butI want to get some BP member thoughts about doing a cash out refi on investment properties before I make a decision.

Pros/Cons?

the rates for a cash-out/refi on investment properties are typically higher (ballpark 4-5.250%) but since you're already pretty much within that range you wouldn't be taking much of a hit with a higher rate than what you are currently at. and LTV is also capped at 75%. Some banks also limit the amount of financed properties (almost sure a borrower can't have more than 10) in order to qualify for the cash-out/refi on a non-owner occupied residence.

How much do you think the property would appraise for? What is the current principle balance on your mortgage? And how much are you looking to borrow? Also, how's your credit? 

Between all 12 properties I have an estimate 265K in equity. I wont be refinancing my own home - just my investment properties.

I just want to put that equity to work so I dont have a certain dollar figure in mind. Ideally I would like to use as much as possible to increase my rates of return. Many of my properties are returning 12-20%, not including appreciate and tax benefits. If I can borrow at 5% it seems to do this as much as possible until I retirement nears or I plan on needing cash.

Originally posted by @Adam Craig :

Between all 12 properties I have an estimate 265K in equity. I wont be refinancing my own home - just my investment properties.

I'm not sure if you have any relationship with a smaller local bank or credit union, but you might want to consider start building it. Smaller banks have different underwriting guidelines and can be more of a partner for investments. I recently had a really great experience at one of our local banks. They consider portfolio loans as well, with your portfolio you might be able to get some more cash. Good luck! 

@Adam Craig I understand your thought process. Not knowing the details, it looks like you have roughly 22K in equity per property (265K/12). If that is the case, I don't think the increase in interest rate, plus closing costs, to net what a bank might allow you to cash out would be worth it.

Now if my underlying assumption was wrong, my analysis doesn't hold water. 

I would say first, see what finance options are available, in your situation that will probably dictate what choices you have available to you. You may find that finding someone to do a cash out refi may be tough, they may only do 75% LTV and with 3K in closing costs. You may decide that it is not a good idea, or the lending market may decide for you.

If you have good long term financing in place and want to expand at a pace beyond what your cashflow will let you, consider private money/ JV partnering. You have a proven system, someone has cash. Your return on that will increase your yield from the portfolio, achieving what you were looking for initially.

Its the bank you should be talking to.  Ask them what might work for you?  My bank only gives 70% of appraised value.

Assuming you have a relationship with a local bank you could pool all that together in a HELOC. With your new 265K HELOC you can buy a property cash, fix it up and after a year since you have forced appreciation refinance it and pay off the entire HELOC. Then rinse and repeat or since I am pretty sure your market is much like MI have multiple purchasing going at once and rinse and repeat. This essentially gives you an infinite rate of return since you should be able to buy with no money into the deal now. Make sure you evaluate the ARV properly and don't overspend on the rehab cost.

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