To Cash out Refi or not?

Question

Hello all,

I am currently trying to figure out if I should cash out refi and buy another house in cash, or save up and acquire another house with a mortgage. My strategy is to buy houses that need work (so its below market value) and then rent them once repaired. My goal is to have enough cash flowing properties to where I can build cash as fast as possible, buy more houses, and at a certain point begin paying them off/retire.

Basically the only advantage I see in doing a cash out refi is that I will have the money to buy a property in cash. My issue is that if I cash out refi, my cash flow will go down slightly (because the houses have appreciated in value since i bought them), and this is going against my goal of building cash flow. The advantage is that I can buy another house with cash (and own it - supplementing cash flow drastically). I have done the math, If i acquire another property with a conventional 20% down mortgage, then I will cash flow the same as if I did a cash out refi and bought one house in full cash and rented it.

This is where I am stuck, which is the better strategy? Cash out refi or go conventional and end with the same cash flow?

Jacob Higginbottom · Answer

Great question.  I am in a similar situation but with less capital. I have a rented investment condo that has about 60% equity and cash flows about $220/mo. It’s in an ARM at year 15 at 5.125% and rising. I’m considering a cash out refi to bring it to about 40% equity or 60% LTV and extend the mortgage to another 30 years at 4.75% fixed and take the cash to use for my next BRRR.  Anyone have thoughts on this?  Much appreciated.

Beginning BRRR is boston

Chris Mason · Answer

It appears you've already done the math I was going to suggest -- calculating cumulative cashflow.

Here is something you didn't seem to consider: the discount that an all-cash buyer can expect to get. I don't know what that will be in your market and that's a great question for a local real estate agent with boots on the ground in your area, but toss that into your math as well.

I expect that you will find, overall, that it puts you in a better cash flow position.

Also, as others can/will attest, it's a pain in the butt to get a traditional mortgage on a run down and beat up home. Buying all cash and cash out refinancing them based on ARV when ready to make your next move is going to overall be fewer mortgage transactions (eg, fewer closing costs) relative to BRRRRRRrrrrrr, discounted homes, and included among them homes that no one could get a mortgage on anyways (these will be your MOST discounted).

Those incomplete homes purchased all cash will be huge money makers for you. Here's the thing: gutting and replacing a kitchen is going to cost you way less compared to buying a home with a pre-gutted kitchen (squatters, thieves, etc) and putting a new one in. Two reasons: 1) Less demo cost 2) Greater all-cash discount on the purchase price.

And also guys like me will have fewer "uhhh yeah so Fannie Mae won't lend on it if it doesn't have a roof... duct tape and a tarp doesn't count" phone calls. Needs to be a functional and complete home to use Fannie's cheap money to buy it.

For people NOT in your position of being able to buy all cash, I often suggest granny homes. Grandma has lived there for 50 years smoking inside, not upgraded anything, there's cat urine smell, and now grandma has moved on, but she left behind a basically functional and complete home that Fannie will lend on. In your position, you can/should go for the homes that were typical granny homes 5 years ago, and then were blights for 5 years and criminals stripped the appliances, etc.

Matt F. · Answer

Additional thoughts: the cash out refi would combine 3 mortgaged properties into one big loan. Another part of my strategy was to build cash flow and then being paying 1 house off at a time with the cash flow from multiple properties. If they are under one loan this wont work. I would need to buy with cash, then refi into a separate mortgage.