Why ever sell if you can do cash out refi several times over 30 years

Question

Hello Fellow Investors (Warning: this somewhat advanced but could be genius with your feedback, so be patient)

I have been giving this strategy a lot of thought, and would like everyone's feedback. After selling 2 of my rentals because "i hated my tenants," I realized that i really didn't make much after: 1) having to repair the house again after the tenant moved out and 2) paying concessions and closing costs; 3) depreciatin recapture.. I then began to think of a way for it to make sense...maybe as much as sense as 20-30% flipping.

So here is the strategy with an example: Buy all cash at $85K (get most discount), fix for $15K. ARV is $130K. This should be rented for $1,000+. After 6 mos-1 year (sufficient seasoning), pull the money out with either Fannie Mae financing or a local lender (4-6%). They will give you 75-80% of value after seasoning period (or more), which is $100-104K. Remember, you are in this property for $100K to begin with, and after 1 year you get your money back, you still have 30K of equity in the house, and you are at least cash flowing positive (this must be the case with all loan/taxes/insurance/management payments). Ten years go by, and you own the house again because the loan is paid down (give or take 5 years really depending on market).

Then you go to refinance the house again (not sell, refinance) and can pull another $100K or more (if property appreciated) out of the house.  Wait a a minute... You pull out $100K and you pay no tax on the $100K because it's a loan not a sale.  So, every 10-15 years you can pull out $100K on this house and not pay tax.  So, you do this with 10 houses and you're pulling out a lot of cash over the years all tax free.  It's like looking at each house you buy as 4 houses you just made money on (over a 40-60 year span, then to ur kids).

(items not considered:1) repairs over the years after tenants leave. 2)If you can't buy with cash, so what, the calculations will be a little off. But the idea is still the same.3) It won't work in CA or high price markets that don't cash flow; 4) you are limited to the number of houses under fannie mae; 5)

Please let me know what is wrong with this model, and if you have a better model, or other ideas, please let me know.  What i didn't say is that i will be doing other flips along the way with other funds in order to get more rentals.

Thanks everyone

Kyle Hipp · Answer

I do something similiar. I can aqcuire a property and fix it up and then do a cashout refinance for 70% LTV on a commercial mortgage. There really isn't much of a seasoning period. Just having a lease and renters in the property. I always set the notes up woth 15 year ammortization so my equity position gets better quicker. Then I have more options as time goes on. With going in with a 15 year ammortization that is the basis on which I analyse my cashflow and want $150/door minimum. I have purchased with the idea to flip but eachtime I have decided to rent it out and pull cash out. It is great long term.

@Mike S - there is no taxes due on refinancing a property with cash out. Even in your example where total money into the property is $100k and you pull out $104k, no taxes...

Account Closed · Answer

Put 4 mortgages under your spouse's name and 4 mortgages under your sole name. Now you have 8 mortgages. The moment anyone of you goes above 4 loans, that individual can no longer do cash out refinance with a conventional lender. Therefore, it makes more sense to pay-off one property at a time to lower the number of mortgages to 4 or less so you or your spouse can do cash out refinance again.

Bryce Y. · Answer

Also keep in mind when you go to refi in 10 years or however long it takes you to pay down the loan, there is a good possibility rates could be much higher than what they are now.  Plus you will have a new set of closing costs.  Basically it makes no sense to hurry up and pay off a low interest rate loan just to refi it at a higher rate.  Also this is not possible once you have more than 4 conventional loans.

Michael Seeker · Answer

Interest expense does lower income, however I don't think there is any sound reason to pursue what you're suggesting.

Most buy and hold investors either want to maximize leverage in order to obtain more properties and get a better cash on cash return OR minimize or eliminate leverage by owning rentals free and clear which lowers risk and negative cashflow during vacancies.

What you're suggesting is to pay off the bank faster (i.e. pay less interest) so you can refinance sooner and pay more interest.  It sounds like your logic for wanting to refinance is to pay the bank more interest so you don't have it taxed as income.  I don't think it makes any sense to pay somebody else more money so you can pay less in taxes...you'd effectively be giving away your income so as not to be taxed on it.  Feel free to correct me if I'm missing something.

Rav Ram · Answer

----> RE: Michael: Why pay down the loans at an accelerated pace if you're just going to fully leverage the property again?

These properties can cash flow and be paid off in 10 or less years. Should i take 30 years to pay them or pay them off quicker and then pull $ out again. I don't know this one...I figure interest expense lowers income, the higher the expense, the lower the income, and then do it over and over?

Arthur Garcia · Answer

@Rav Ram  - Another issue to consider is that it is very difficult to continue pulling money out via "cash out refi" once you obtain more than 4 fannie mae loans.  Also as @Johnson H. pointed out, most lenders overlays will require 12 months of seasoning before you can use the ARV as the new value of the home.

However all is not lost, a few additional options, which you probably already thought out, but for other folks reading:

1. Protfolio Loans - Talk to community banks and see if they will allow you to put your older fannie properties (ones you've already stripped the equity out of) in a protfolio loan.  These are loans where the bank actually KEEPS the note and does not sell them to another investor.  Usually the rate on these loans is higher and the terms will be shorter, but this will free you up to borrow more Fannie Mae Loans.

2. Blanket loans - this is more of a commerical loan product where the community bank will attach ONE mortgage to multiple assets (4-5 houses on one mortgage).   Same deal here, pull the equity first, then roll them into a blanket loan and continue to borrow more fannie mae loans.

3. 1031 - Exchange the equity to another investment property and defer the taxes.

4. Partners - this can be tricky, but is "doable" if you are working if someone you trust (family or business partner).   In examples you've listed above, instead of you pulling the money out, you put your partner on title and have them take out the cash via a loan in their name (after the property has seasoned).

Just a few thoughts...

AG

Johnson H. · Answer

As of this time, you can only cash out refi a cash purchase within six months with a FannieMae product called delayed financing using 70% of purchase price. I spent the last three months trying to cash out refi until I found a large portfolio lender to refi with me with 65% LTV of appraised value. You will definitely need to find a local lender that is willing to work with you with the strategy you outlined.

Michael Seeker · Answer

I believe if you borrow above your basis (i.e. if you borrow 104K but only have 100K into the property) then you're looking at paying taxes on the difference.

Also, it sounds like your plan is to go from no leverage (fully cash investment) to max leverage (75-80% LTV), then pay that loan down at an accelerated pace in order to be debt free in 10-15 years (instead of 30 years that's on the loan) then you want to fully leverage again.

Why pay down the loans at an accelerated pace if you're just going to fully leverage the property again?

Why ever sell if you can do cash out refi several times over 30 years

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