Cash out refinance or wait for more appreciation?

Question

Hi,

I have a property in Austin, TX that I just turned into a rental property and I have about 200K in the property. I am considering pulling some money out and either holding the cash until I find another property or just have extra cash on hand. My hesitation is wondering if there's enough equity to make a cash out refinance worth it as well as potentially waiting a year with how crazy Austin's market has appreciated. I am only 1 year into the 30 year mortgage at this point.

Any advice on whether or not this seems like a good strategy or if I should wait a little bit longer?

Thanks,

Daniel

Ryan Kelly · Answer

@Timothy Hero this has to do with residential refinancing in Texas, which is written into the Texas Constitution. They are called Texas Section (a)(6) mortgages, or cash-out refinances based on Fannie Mae and Freddie Mac guidelines. I misstated 75% equity must remain, it's 80% according to the guidelines. Commercial mortgages likely don't apply to this section.

https://themortgagereports.com...

Danny Webber · Answer

If you can borrow at a low-interest rate and reinvest at higher appreciation then that may make sense depending on your long-term goals.

Jaysen Medhurst · Answer

Okay, @Daniel Tisdale. I'm a little skeptical of the $700/month cash flow number. Does that account for Vacancy, Repairs, CapEx, and Management (always account for management, even when self-managing)?

Even taking your CF number that returns ~4% Return on Equity (ROE) for the $200k you have in there. I'd want to see a ROE of at least 2X that.

The reality is that SFR properties above ~$130k in value become increasingly difficult into make viable rentals. Either they don't cash flow, the ROE sucks, or both.

Jon Kelly · Answer

@Daniel Tisdale if you can roll all fees into the new loan and you pay nothing out of pocket I would refinance. Even if you need to leave 25% equity in the property it sounds like you can pull out $50-75k. If you don't refinance now the equity just sits there.

I'd also try to identify another investment vehicle immediately when you get the cash. Ideally you can move it directly into purchasing a new property.

Timothy Hero · Answer

As a mortgage broker who has closed many deals in Texas, I've never heard of this 25% equity rule. Is this conventional? I do mortgages in the commercial/private sector and this isn't a rule for us.

Nate Sanow · Answer

@Daniel Tisdale

You can always refi a property more than once, and doing it now will not prevent further appreciation (just a thought). If it was me, I’d do it now. Appreciation is never guaranteed, and if things tighten again like they did at the start of Covid, cash out refi’s are one of the first things to go.

You of course get lender and title fees every time you refi but in my experience you can get it rolled into the loan and not have to pay out of pocket.

Ryan Kelly · Answer

@Daniel Tisdale leave enough money in to cash flow positively after all expenses AND build reserves for any future capital expenses. Whatever number that is for you, that’s the optimal amount.

Daniel Tisdale · Answer

Hi @Ryan Kelly, that's what I was factoring into it. I guess I'm more curious if there's an "optimal" amount of equity to leave in properties versus utilizing that equity to go purchase more properties.

Ryan Kelly · Answer

@Daniel Tisdale in Texas, you have to leave 25% equity in the home when doing a cash-out refinance, so take that into consideration. If you have enough equity you can pull out that you want to use, I don't see why you couldn't refinance. You can always refinance again in the future when you add even more equity. Otherwise, you are in a good equity position.

Daniel Tisdale · Answer

@Jaysen Medhurst it is worth between 500K-525K and I owe about 305K on it. Right now the cash flow is around $700 per month on it.

Cash out refinance or wait for more appreciation?

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