Cash out refi to buy other property

Austin, Texas
Creative Real Estate Financing
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Cash out refi to buy other property

Anand Acharya
Member since 2022 · 12 posts · 5 votes

I am currently owning a rental property that is generating positive cash flow. It has enough equity that I can cash out if I refinance. However, with current interest rates, I will be paying much more in interest and it will turn into negative cash flow. My plan is to pay down for  a duplex or quadplex with the equity that I can take out with refi. Then I am not sure if the overall ordeal will create some positive cash flow or not. 
I would appreciate if someone can help me out run numbers and figure out what would be the best course going forward in terms of creating some cash flow as well as create value out of the situation.

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Brenden MitchumBusiness Member
Rental Property Investor · Atlanta, GA · Member since 2019 · 1k+ posts · 872 votes
4y

Hey @Anand Acharya, welcome to the BP community!

Very clever to look at the total return, rather than separate them by property. However, maybe a bit too clever? Personally, I would never want a property that is losing money, even if it helps me purchase something that cash flows. This property will always be a liability unless I am able to raise rents enough to cash flow. Maybe this is an option for you? Are you below market now? Are there some low cost updates you could do to justify a rent increase? Maybe you could decrease the equity you pull out, which would lower your payment so that you can still cash flow? This is what I would look into first. The alternatives, in my mind, are to sell or hold but definitely not refi into the red. 

Let's say you do this assuming your total return will be net positive over current. What if you have a hard time finding that cash-flowing duplex or quad? At what point is it a bad total return vs. a good one? Rates will likely continue to climb for a while so this could make it tough to cash flow on the new property (assuming you're leveraging that equity you pulled out of the other). Just things to keep in mind if you decide to analyze based on total return. 

Hope this helps a bit. Please, feel free to reach out anytime if you have other questions or just want to chat!

[email protected]404-737-0018
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  • Brenden MitchumBusiness Member
    Rental Property Investor · Atlanta, GA · Member since 2019 · 1k+ posts · 872 votes
    4y

    Hey @Anand Acharya, welcome to the BP community!

    Very clever to look at the total return, rather than separate them by property. However, maybe a bit too clever? Personally, I would never want a property that is losing money, even if it helps me purchase something that cash flows. This property will always be a liability unless I am able to raise rents enough to cash flow. Maybe this is an option for you? Are you below market now? Are there some low cost updates you could do to justify a rent increase? Maybe you could decrease the equity you pull out, which would lower your payment so that you can still cash flow? This is what I would look into first. The alternatives, in my mind, are to sell or hold but definitely not refi into the red. 

    Let's say you do this assuming your total return will be net positive over current. What if you have a hard time finding that cash-flowing duplex or quad? At what point is it a bad total return vs. a good one? Rates will likely continue to climb for a while so this could make it tough to cash flow on the new property (assuming you're leveraging that equity you pulled out of the other). Just things to keep in mind if you decide to analyze based on total return. 

    Hope this helps a bit. Please, feel free to reach out anytime if you have other questions or just want to chat!

    [email protected]404-737-0018
    3Reply
  • Ryan Howell
    Rental Property Investor · Hendersonville, NC · Member since 2016 · 446 posts · 412 votes
    4y

    I would look into a HELOC instead of a refinance, perhaps? Maybe Penfed or another institution....there are a few that will do it on rentals. Then you keep the primary mortgage at the current rate, but can tap into the equity for the next deal.

    1Reply
  • Peter MckernanBusiness Member
    Residential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
    4y
    Quote from @Anand Acharya:

    I am currently owning a rental property that is generating positive cash flow. It has enough equity that I can cash out if I refinance. However, with current interest rates, I will be paying much more in interest and it will turn into negative cash flow. My plan is to pay down for  a duplex or quadplex with the equity that I can take out with refi. Then I am not sure if the overall ordeal will create some positive cash flow or not. 
    I would appreciate if someone can help me out run numbers and figure out what would be the best course going forward in terms of creating some cash flow as well as create value out of the situation.


    I would not want to go negative cashflow to buy a property, pay off some of a property, or put your self in a short-term place that later maybe worse. It sounds like it's a short-term middle ground fix for long term thinking. The best thing I would do is put a HELOC on it and not do a cash out (be careful since the rates are changing these will too), and then deploy the capital only for a short-term situation then pay it back. This can be used in a BRRRR or a flip property, I would not use the HELOC in this interest rate environment for a long-term plan. The negative cashflow in this market may put you in a really bad spot and make you have to sell for a loss.

    Another couple options would be to gain capital from more active ventures which would be flipping, wholesaling, and real estate sales. Things to think about! 

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  • Conner Olsen
    Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes
    4y

    @Anand Acharya You can rent your property furnished to increase your overall cashflow then you can refi knowing that you won't be going negative.

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    4y
    Quote from @Anand Acharya:

    I am currently owning a rental property that is generating positive cash flow. It has enough equity that I can cash out if I refinance. However, with current interest rates, I will be paying much more in interest and it will turn into negative cash flow. My plan is to pay down for  a duplex or quadplex with the equity that I can take out with refi. Then I am not sure if the overall ordeal will create some positive cash flow or not. 
    I would appreciate if someone can help me out run numbers and figure out what would be the best course going forward in terms of creating some cash flow as well as create value out of the situation

    Hey Anand, 

    Keep in mind that HELOC's are variable and best used for short-term holds. There is a 40 yr fixed DSCR style loan available that offers lower monthly payments. I would love to see if it will help you in your current situation.

    [email protected]818-269-7983
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  • Michael PorchePro Member
    Rental Property Investor · Boise, ID · Member since 2017 · 220 posts · 101 votes
    4y

    @Anand Acharya This is definitely a unique situation to be in haha. However, what I can say would help

    1. 1. Why are you looking to cash out refinance?
    2. 2. Would you consider a HELOC so that you don't have to pay the new interest rates on a full new loan?
    3. Now it all depends on why you are refinancing. If you are looking to do this to leverage your house so that you can buy a new property where cash flows like crazy... well then paying (-) cashflow might be worth it.... now it might be even better if you can leverage a HELOC in order to buy another property to produce a lot more cash flow!
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  • Fiza Ah
    Investor · Member since 2020 · 80 posts · 71 votes
    4y

    This certainly feels like a situation where you should consider selling vs. renting. If you're not cash flowing significantly, and there's a significant increase in value, you may be better off re-investing in a place where you're making 10%+ cap rate.

    1Reply
  • Anand Acharya
    OP
    Member since 2022 · 12 posts · 5 votes
    4y

    Thanks for your responses. I did consider HELOC and approached local credit unions and some big banks. Nobody is offering me HELOC on an investment property. They are happy to give HELOC on my primary though. That is the reason I am considering refi. But the new interest rate is almost twice what I am paying now and I am only 10 years in the current mortgage, so the cash-out refi is hurting quite badly.

    I will check with Penfed as suggested by @Ryan Howell. If there are any other institutes that provide HELOCs on investment properties, please let me know.

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  • Kristen FillaPro Member
    Member since 2020 · 1 post · 0 votes
    4y

    @Anand Acharya have you tried Frost Bank? We were able to get a HELOC through them last year. I'm not sure if they offer HELOCs on non-primary homes, but the bank we've worked with and asked about HELOCs referred us to Frost. We've had an awesome experience with Frost, so far! Best wishes on your restructuring - whatever way it takes place!

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