Should I Cash Out Refi to jump start some out of state investing?

6 Replies

Hi BP! I'm new to the real estate world and am thinking that in addition to some of my savings, I'd like to use some equity from my primary residence to purchase an investment property. I'm not a math whiz and it seems to make sense to me to do the below cash out refi but I know there are smarter people on here that can hopefully offer some input.

Current Loan: 

  • 30 year fixed rate @ 4.25% (just closed a refinance in April) -Monthly Payment of $3325 + $900 taxes and insurance = $4225 monthly

Cash out Refi: 

  • 30 year fixed rate @ 3.875% - Monthly Payment $3375 + $646 taxes and insurance (lower as I'm adding an Escrow account) = $4020 + $4773 in fees + $4715 total prepaids (taxes and insurance).  
  • Cash out = $41k

Well your payments are actually going up by $25/month, @Veronica Haniger . The real question is if you can take the $41k and put it into an asset that outperforms the market AND pays back the additional fees. That's certainly possible in RE, but you've got to find it.

I'm going to assume that your refi only brings you to 80% LTV. Why not take out a HELOC to tap into the $41k? The rate will be a little higher, but the closing costs are minimal and you don't pay any interest until you actually start using the money. No need to throw away that $4773 in closing costs.

Originally posted by @Veronica Haniger :

Hi BP! I'm new to the real estate world and am thinking that in addition to some of my savings, I'd like to use some equity from my primary residence to purchase an investment property.  I'm not a math whiz and it seems to make sense to me to do the below cash out refi but I know there are smarter people on here that can hopefully offer some input.  

Current Loan: 

  • 30 year fixed rate @ 4.25% (just closed a refinance in April) -Monthly Payment of $3325 + $900 taxes and insurance = $4225 monthly

Cash out Refi: 

  • 30 year fixed rate @ 3.875% - Monthly Payment $3375 + $646 taxes and insurance (lower as I'm adding an Escrow account) = $4020 + $4773 in fees + $4715 total prepaids (taxes and insurance).  
  • Cash out = $41k

 You're going to need to find something with the 41K that makes sense.  This is possible and you can probably do better on the rate as well.  

You can do this just do your homework and build a team around you with experience.

Thanks @Shaun Weekes !  Ok, I'll get in touch with a few other lenders to see how low I can get that new rate.  Yes, I have found a couple of properties via PropStream and have run the numbers on the calcs provided here on BP.  Both properties would offer good cash flow and cash on cash return if I can get my offer accepted. 

@Jaysen Medhurst Yes the refi brings me to 80% LTV. The HELOC is another route that I'm looking into. I think the piece that I'm stuck on is the adjustable rate but I can get past that since I would plan on paying that balance back once I rehab and refi. The other, longer term, thing that I'm thinking about is the affect on my debt to income ratio but maybe I'm just overthinking things (?) Would I look just like a cash buyer with the HELOC?

@Veronica Haniger , a HELOC would enable you to make a cash offer, assuming you can get a property for $41k...

Don't get hung up on the variable rate. You're looking to use the HELOC as short-term debt, which is the right approach. The additional interest will be minimal and still a lot cheaper than HML.

I work in an financial advisers office and their rules are that taking cash out for variable investment purposes is risky and not necessarily recommended. If you can afford that increase in payment, are secure in your employment, or even are secure enough in not receiving rental income in the event that your tenants do't pay. then go ahead and make the investment. The numbers always work.... but tenants and job circumstances, do not necessarily work in the landlord or owner's favor. BTW, I am in favor of the cash out, but throw caution to the wind for those who are uncomfortable in first glance. (I.e. you posted on this site. )