Cash out refinance now or wait?

Question

Last summer I did a full rehab on a low-cost condo unit that is serving as my primary residence but bought with the intent of being folded into my rental portfolio in the future. I have ~$30k in equity from the rehab.

My goal is to put my self in a position to purchase a BRRRR property in 2020. My original intent was to do a cashout refinance (approx $25k cash out after closing cost) in late 2019. However, interest rates continue to fall (which is good) BUT it seems the housing market generally may have peaked, which could impact my appraisal value if I wait.

As far as I can tell I have 2 options:

1. Wait to refinance until late 2019/early 2020 and hope that interest rates stay low AND hope that real estate values remain relatively steady so I can get my estimates appraisal value.

2. Refinance now, lock in the low-interest rates and relatively high real estate values BUT have to carry the increased debt load and just sit on the cash for a full year until mid-2020.

What would you do in my situation?

Account Closed · Answer

@David Barnett thank you for helping me think through this!  The more I read about HELOC's, the more I like it. I could lock in the "good" appraisal value now, and have it available for the eventual downturn, without having to take on more debt until I actually need the cash.

Jake S. · Answer

Account Closed Got it. Yeah sounds like a plan. You might as well wait if you dont plan on doing anything with the extra cash for another year or so anyway then

Account Closed · Answer

@David Barnett  Since it is technically my primary residence, I aim to do an 80% LTV

Here is some napkin math:

Mortgate goes from 72k to 100k. Payment goes up $150 per month, so it cost me $1800 to hold that cash for a year.

However, I plan to put that cash in a money market account paying 2.25%, so it would net out to only costing me around $1000 to hold that cash.

So if the appraisal comes back even just 1% lower than anticipated next year, I've already "profited" by cashing out early. So in that case, I'm inclined to agree with your point.

To support @Jake Stuttgen's point, borrowing money just to sit on it seems kinda of silly, and people have been talking about real estate "cooling off" and "the next recession" for years and years now. Values could very well keep going up.

I may be splitting hairs here, just trying to understand how experienced investors think about their cash.

Joe Splitrock · Answer

How do you rent from yourself? Either it is a rental or is your primary residence.

The trouble here is you are taking on extra debt that and the interest is not tax deductible. You may be investing in a 2.25% investment, but that income is then generating taxable income. I think HELOC is better because you just use it when you need it and assuming you only use it for rental properties, you can actually deduct the interest.

David Barnett · Answer

Account Closed That wouldn't change the equation.  You are still paying the mortgage and "renting it to yourself at market rate and pocketing the difference," doesn't take away from the fact that you would be paying for the mortgage to be sitting in a money market account if you were to do the cash out refi.  The difference would be if you were renting the property out to a third party and they were paying off the mortgage for you (through rent), then a cash out refinance might not be a bad play to have the cash available for when you are looking to purchase a property next year.  Since you are responsible for all sides of the equation (rent and mortgage payment), this doesn't work in the same way as a normal investment with a third party tenant.

David Barnett · Answer

Account Closed Thanks for the additional information.  The primary residence piece is a huge portion of the equation.  On the property that I'm refinancing, it is an investment property that will still cash flow (i.e. the tenants will be paying for the additional cost of the mortgage/second mortgage).  Have you approached any lenders for a HELOC?  I likely wouldn't do a cash out refinance to have cash sitting there for a year, especially since it's not a huge amount of cash.  If you are sold on the idea on a cash out refinance, I would take a look at a CD to see if you can get a better rate than the money market account.

David Barnett · Answer

Account Closed Would the cash out refinance bring you to an LTV of 75%, 80% or something else?  I'm in the process of doing a cash out refinance on one of my investment properties, and will be parking the cash until I find a deal.  The market that I invest in is pretty hot right now, and I'd rather lock in the higher property value and hold the cash than to wait and possibly not be able to pull out the equity that you were expecting.

Jake S. · Answer

Hey Account Closed! Any reason you want to wait until 2020?

Account Closed · Answer

@David Barnett the reason i used the "Technically my primary residence" is because I set it up so that I rent it from myself at the market rate, and then pocket the "cashflow". When I do the math on a Cash out Refi, it stilll cashflows and my my COC ROI goes up. Not sure if that changes the equation or not. But I will definitily do the comparative math between a cash out refi and a HELOC. Assuming I buy 1 property a year, it may make sense to just borrow from the HELOC for just a few months when necessary and pay it back quickly.

Account Closed · Answer

Hi @Jake Stuttgen, Mostly to build up cash reserves from:

1. Other Rental Property Casfhlow 2. W-2 Jobs 3. Cash Out Refi

Given my projections, I cant imagine being financially ready before then.

Side Note: I'm not trying to time the market perfecty, BUT it sure seems very possible that by next summer we could be in a recession (there seem to be a lot of warning signs, inverted yeild curve, etc.) so I want to be prepared financailly to take advantage.

Cash out refinance now or wait?

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