Cashout refinance from current house before starting to rent

Creative Real Estate Financing
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Cashout refinance from current house before starting to rent

Jimmy Jam
Investor · Itasca, IL · Member since 2016 · 2 posts · 0 votes

Hello BiggerPockets Community,

I am relatively new to real estate investment, so looking for some suggestions from the wider BP community.

I have own my current place for 10+ years and now buying a new primary residence. My plan is to put the current residence up for rent. However, I wonder if I should take out the excess equity in the current house and use that to fund additional payment (beyond 20%) for my new residence.

I realize that the mortgage interest on the rental property can be deducted from rental income while mortgage interest on the primary residence can only be deducted if itemized deductions goes beyond standard discussions.

On the other hand, if I cash-out additional equity, I am increasing the liability (putting down extra money) on my primary residence.

Any suggestions amongst the two options would be much appreciated. Also, happy to take advice on other options.

Thanks in advance!

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  • Erik EstradaBusiness Member
    Lender · Member since 2022 · 6k+ posts · 1k+ votes
    2y
    Quote from @Jimmy Jam:

    Hello BiggerPockets Community,

    I am relatively new to real estate investment, so looking for some suggestions from the wider BP community.

    I have own my current place for 10+ years and now buying a new primary residence. My plan is to put the current residence up for rent. However, I wonder if I should take out the excess equity in the current house and use that to fund additional payment (beyond 20%) for my new residence.

    I realize that the mortgage interest on the rental property can be deducted from rental income while mortgage interest on the primary residence can only be deducted if itemized deductions goes beyond standard discussions.

    On the other hand, if I cash-out additional equity, I am increasing the liability (putting down extra money) on my primary residence.

    Any suggestions amongst the two options would be much appreciated. Also, happy to take advice on other options.

    Thanks in advance!


     Hey Jimmy, 

    Before putting your house up for rent, 

    Have you looked into qualifying for a HELOC or second mortgage and using those funds to buy your primary residence?

    Also, what would it look like putting less money down, (5% conventional) and borrowing at today's rates, and using that extra funds from the cash out to buy another rental? Would you still be cash flowing?

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  • Jimmy Jam
    OP
    Investor · Itasca, IL · Member since 2016 · 2 posts · 0 votes
    2y

    Thanks @Erik Estrada. Cash out to buy another rental unit is definitely an option. I am thinking to wait until the rates go lower for 30 years mortgage!

    Thanks

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  • Bonnie Griffin KaakePro Member
    Real Estate Consultant · Denver, CO · Member since 2021 · 661 posts · 389 votes
    2y

    @Jimmy Jam  When you put your current property up for rent, it becomes rental property that can likely benefit with a cost segregation study. You may be eligible for a tax benefit that gives you more cash flow for your investment in your next property. Keep accurate records of everything you do to your current property while getting it ready for rental. Depending on your tax rate, this could result in 6-8% of what you paid for your house plus renovations in the process of getting it ready for rent. Estimates are free and will give you an idea of what extra benefit you may have. 

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  • Jessie Dillon
    Investor · Hopedale, MA · Member since 2021 · 321 posts · 212 votes
    2y

    depends on your comfort levels and personal investing goals!

    some people are more comfortable with as little leverage as possible, and others are comfortable with a lot of debt.

    some people would rather have a lot of real estate appreciating for them, but not cashflowing as much (the refi option you talked about), and others would rather have fewer properties that cashflow more.

    keep in mind what the current rates will do to your cashflow if you do refi.

    hope this helps!

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