Real Estate Agent · Fairfax, VA · Member since 2019 · 79 posts · 68 votes
Hello, I bought a property back in 2016 and it has increase in value of around 3% - 4% each year. Is it worth to cash out the equity now to put down payment on another rental property?
Is the cashout going to be done on your primary residence or a rental property? And second, do you have two years of experience with rental properties that can be proved with bank statements or tax returns?
The reason I ask the above is you can do a 20% down on the cashout refi and free up more money if its your primary residence or if you have two years experience as an investor.
For example, 80% of 470K is 376K, Minus your debt outstanding of 220K. Funds available for cashout would be 156K. But keep in mind your mortgage might be much higher with 376K of debt? So as long as you can afford the new payment, as you have already noted, you have a good chunk to put down on two new properties.
You're right refi will require closing costs (the 6K you noted), so will the new investment property loans. Find a good broker and I think you can budget for $3,500 in closing costs for each loan, maybe less. 10K budget for all three loans is very doable in most markets I think.
Closing thought make sure you track not only the interest on the new investment loans since this is deductible but also the new interest expense on the refi'ed home since this increase in interest rate is also tax deductible. I'm working on this exact tax situation in 2019 taxes.
Short answer, if the numbers are favorable and you have proper debt coverage, yes. Pulling your equity and leveraging into another property is a great way to increase your cash on cash return. But, if you over-leverage your assets you could find yourself in a bind if/when the market dips. I would suggest doing a bunch of research and coming back with some more details regarding your plan if you're looking for a more tailored answer.
If the rents make sense to support a higher mortgage payment. Or you can save the cash flow and use that for a new property. It's a numbers game. Also, consider interest rates and the cost to REFI.
I think with interest rates as low as they are and provided you can cover the increased mortgage payments...assuming you carry more debt after the cash out refi, it is a great way to put capital to work long term and build net worth. What would be your new interest rate relative to the old one? How would your PITI on your property change? If these are all reasonable then I'd say go for it.
If you share real numbers we could provide some better opinions here rather than high level comments.
The property is currently worth $470,000 and loan is about $220,000. Cost to refinance is roughly $6000.
Looks like I can cash out about $127,000.
New property looking at $300k and I can put 20% down payment which is $60k per property. Therefore, with $127,000, I can put down two more rental properties, and build equity overtime.
Is the cashout going to be done on your primary residence or a rental property? And second, do you have two years of experience with rental properties that can be proved with bank statements or tax returns?
The reason I ask the above is you can do a 20% down on the cashout refi and free up more money if its your primary residence or if you have two years experience as an investor.
For example, 80% of 470K is 376K, Minus your debt outstanding of 220K. Funds available for cashout would be 156K. But keep in mind your mortgage might be much higher with 376K of debt? So as long as you can afford the new payment, as you have already noted, you have a good chunk to put down on two new properties.
You're right refi will require closing costs (the 6K you noted), so will the new investment property loans. Find a good broker and I think you can budget for $3,500 in closing costs for each loan, maybe less. 10K budget for all three loans is very doable in most markets I think.
Closing thought make sure you track not only the interest on the new investment loans since this is deductible but also the new interest expense on the refi'ed home since this increase in interest rate is also tax deductible. I'm working on this exact tax situation in 2019 taxes.
I like your strategy on this idea. I would say go for it! I just did a cash out refi on a property I bought in 2015. Got 140k back and rolled it all into a house I paid cash for. When it was all said and done, I basically gained a new rental property plus $150/month positive cash flow. Not great, but I’ll take another property for free basically. And I plan to do another cash out refi on this new property that I fixed up and is worth about 200k now. I like your leveraging idea though.