Cash out advice on rental property

18 Replies

I own a SFR in Union city, CA. Its market value is 1.1Million. I have a 30 year fixed mortgage at 3.375% on it. Outstanding balance is 470k. I have been renting it out in the range of 3500 to 3900 per month for past 5 years. I want to take out some equity from it and invest in rental properties. Whats the best way to do that? And how much can i take out ? I had paid 750k for it in 2005. I am guessing it has to be a cash out refi , because HELOCS are hard to get on rented homes. I spoke to a mortgage officer from chase bank, he said i can get 200k cash out, and the new loan of 670k will be a 7/1 arm at 3.875%. Getting more cash out puts you in the jumbo loan category and thats hard to do. For HELOC, he said thats very risky and he will not do it. I have good W-2 earnings and a 800+ credit score. Please advise and recommend any bankers, brokers who can help me with refi or heloc so i can cash out my equity. Thanks
Originally posted by @Khader Moh:
I own a SFR in Union city, CA. Its market value is 1.1Million. I have a 30 year fixed mortgage at 3.375% on it. Outstanding balance is 470k. I have been renting it out in the range of 3500 to 3900 per month for past 5 years. I want to take out some equity from it and invest in rental properties. Whats the best way to do that? And how much can i take out ? I had paid 750k for it in 2005. I am guessing it has to be a cash out refi , because HELOCS are hard to get on rented homes. I spoke to a mortgage officer from chase bank, he said i can get 200k cash out, and the new loan of 670k will be a 7/1 arm at 3.875%. Getting more cash out puts you in the jumbo loan category and thats hard to do. For HELOC, he said thats very risky and he will not do it. I have good W-2 earnings and a 800+ credit score. Please advise and recommend any bankers, brokers who can help me with refi or heloc so i can cash out my equity. Thanks

Is there a reason you want to keep this property? Is it an appreciation play long term?

I ask because a $1.1M property that's renting for $3,500 per month sounds like it's better off being sold so you can deploy that $600k+ of equity into better deals that will provide much better cash flow and returns.

As far as the cash out refinance goes you will get 70-80% LTV depending on the lender and program you use.

Yes, that location is seeing some good growth , hence keeping it purely for equity growth and i had a long term tenant in there. Tenant is moving out now. So, I am thinking of couple of strategies.
1) To sell and reinvest in other properties, i will have to do a 1031 exchange since it has been about 5 years since it has been my primary residence.
2) continue to rent it out and wait for value to increase further. I have a new tenant willing to pay 4000 pm. Take cash out, and reinvest. Either via refi or HELOC. And maybe sell it in few years.

Originally posted by @Khader Moh:

Yes, that location is seeing some good growth , hence keeping it purely for equity growth and i had a long term tenant in there. Tenant is moving out now. So, I am thinking of couple of strategies.
1) To sell and reinvest in other properties, i will have to do a 1031 exchange since it has been about 5 years since it has been my primary residence.
2) continue to rent it out and wait for value to increase further. I have a new tenant willing to pay 4000 pm. Take cash out, and reinvest. Either via refi or HELOC. And maybe sell it in few years.

Makes sense in that case then yes I would either cash out or use a HELOC to tap into that dead equity for more deals.

@Khader Moh

Keep the SFR in Union City, Ca. and refinance it. Interest rates are still relatively low for investment properties, especially if you keep the DTI low enough.

I just refinanced a property and am in the process of getting a HELOC on my primary residence. The lender I am using is great and may be ale to shed some hard numbers on this for you. I mean, ultimately it will come down to numbers.

If you would like his information PM me and I will get it to you. 

Someone else mentioned the relatively low 'rent to price ratio'. With your 600K in equity you could buy about 2.5M of rentals in the midwest that would bring in about 25K per month of 300K per year. That is not for 'fixer uppers'. That is 10-20 year old duplex and fourplex that are relativley low maintenance. Plus you would have approximately 100K per year of loan paydown and appreciation. 

Are you sure  that your potentially higher appreciation in your market outweighs the relatively low rent?

Just food for thought.

Dan Dietz

608-524-4899

@Jonathan Pflueger please share your lenders info. I am new here. I am replying using the BP app on iphone. I don’t see an option to PM you.

I spoke with Chase bank today, they will not go to a jumbo loan on cash out refi. So the max loan will be 680k. That means i can take out 210k max.

Bofa can go up to 70% of LTV, they have offered 400k cash out at a 5.75% and $4000 closing cost and appraisal fee of $600.

Both refused HELOC since its an investment property.

@Dan You make a compelling point. I think I should sell that SFR in CA and reinvest in Austin, TX doing a 1031 exchange. Its hard to manage rental properties remotely, hence I prefer investing in my current home town of Austin.

Anybody here know the Austin market well? What are the best investments in and around austin, if i have 2.5 million to invest. Also, I am trying to model this out in a spreadsheet, if anybody has one , i would highly appreciate if u can share.

@Khader Moh

BP does not allow us to post services of any kind in the forums so I had to private message you. After you sign into the app with your BP account look to the top left of the app and touch the three dots. Scroll down to the "YOUR ACCOUNT" section and you will see your Inbox. Tap your "Inbox" and you will see your private messages. 

I agree with you Khader that @Daniel Dietz makes a great point and that is certainly one strategy you can go with. I guess it just really depends on your end game. I read your profile and it looks like you are an "accidental" landlord, not really a landlord by choice. I mention this because buying lots of properties is a different sort of investment than owning two or three SFR's. Not better or worse, just a different game plan.

I would say, figure out what your end game and tailor your decision to that. 

Jonathan

@Daniel Dietz makes a great point, and generally I agree with him. I see a lot of people on the forums who want to hold on to properties they own for too long, even when they don't make good investments. That equity can certainly be invested more effectively. That being said, you're going to have a hell of a time 1031 exchanging $600K. In my opinion, you need to assume you're going to have to pay the capital gains tax when you're comparing different scenarios. You only have 45 days from the date of close to identify up to 3 different properties that you will exchange into. And that's not to mention that Austin will be significantly more difficult than the midwest markets that Dan mentions. Austin is much more competitive, and folks here buying out of the MLS are generally forgoing all cash flow in hopes of long term appreciation. It's definitely a complicated decision to make.

@Khader Moh as far as investing outside of your immediate area, I agree that it is definitely more complex as far as finding capable Property Managers etc.... There was a recent podcast that covered this GREAT. I think the name of the guest was David Greene if I remember right. I believe BP has a book on the subject too - I have not read it yet, but have read ALL the other ones available here and think they are all great, easy reads. I think the Podcast was within the last 6 months if you want to search for it. 

One other way to invest outside of your current area to get better returns is to find a partner in the area you want to invest in. Again, not always easy but it is possible. Right now I am working on a plan to do just that with others I know who like you have the assets/equity but no time or down want the day to day headache where I would do all the finding, acquisition, rehab if needed and ongoing tenant management. 

Dan Dietz

608-524-4899

@Jonathan Pflueger You got me right, I got into real estate by accident. And developed a passion for it. My end game is to become a full time investor after retiring. But for now and the next 15 years, I will be working my current job as a techy( big data Machine Learning), so dont have much time for real estate investing and management.

@Kris Wong That exactly is my concern, will I be able to find multiple properties in Austin totaling to 2M in 3 months, to complete a 1031 exchange. If i put my house in CA for sale next week, it may close in 60 days. That will leave 105 days from next week to get my act together for the 1031 exchange. Is that possible while holding a full time job ? Or should I rent out the CA home for another year, use the year to plan things out and then execute the sale and 1031 next year.

I think with a 1031 exchange you can sell one SFR and purchase 10 SFR’s. Can somebody confirm that? Some folks say you can only buy 3 SFR’s.

@Khader Moh, You've got the time frames of a 1031 off a little.  From the day your sale closes you have 45 days to produce a list of potential properties.  Also from the day your sale closes you have 180 days to complete the process.  But you can only complete the exchange with properties from the list and the list goes hard and cannot be changed after day 45.  So that's your true critical path.  But you can go into contract for your purchases before your sale closes.  You just can't take title until after your sale.

Regarding the number of replacements there is no limit on how many you purchase.  However there are limits on how many and how you identify potential replacements.  If you name 3 or fewer potential replacements on your 45 day list then it does not matter how much they are worth.  However if you are selling a relatively large asset and want to replace it with numerous smaller properties then the rules change.  If you want to name 4 or more properties on your replacement list then the aggregate value of your list can be no more than 200% of the value of your sale unless ... you purchase at least 95% of the value of the list.  Wow - That's a mouthful and a lot to wrap your brain around so having a good QI to guide you through is essential (as well as a statutory requirement).

Most folks will go into a 1031 like yours aggressively seeking replacements. They will get into as many as they can during the 45 day period so they have control on the remainder of the process. And the last property or two they name will be a fractional TIC or DST which they will use to dump any funds left over if they can't close on one of their preferred properties or to round out the exchange.

You've got plenty of time to get the 1031 guidance you need and get busy shopping if you want to do it this year.  Real estate is a commodity.  So what is available this week will for the most part be available next week - just with a different address.  So if you start a focused campaign right now you'll be fine. Or you can wait a year like you said if you think the appreciation will continue.

Yours is definatly a property that would be best sold and redistribute your available cash . At this time you have major negative cash flow or put more accurately you are losing a large amount of potential income. Very large losses monthly.

You are holding for appreciation therefor you must have a planed point in time to sell otherwise you are not investing you are simply parking excess cash. If you died in a accident tomorrow would you be happy having sat on your money or would you rather have benefited from it.

I did some analysis/modeling comparing 4 scenarios 

1) Continue Renting in CA

2) Cash out Refi and Reinvest in TX

3) Sell and Reinvest, pay Capital gain tax

4) Sell and Reinvest with 1031 Exchange

Option 2 seems the best from a profit and feasibility perspective.

I would 1031 exchange after you learn the apartment complex business model. You could get a 2.5 million apartment complex in the Midwest that cash flows three times what you are cash flowing right now. You could get about $10,000 a month if you buy right and exponentially increase the value of the apartment complex too.
That's what I did with my pricey San Diego RE and went from $50,000 cash flow per year to the current $160,000 cash flow and rising every year!!

Swanny

Originally posted by @Sal M. :

I did some analysis/modeling comparing 4 scenarios 

1) Continue Renting in CA

2) Cash out Refi and Reinvest in TX

3) Sell and Reinvest, pay Capital gain tax

4) Sell and Reinvest with 1031 Exchange

Option 2 seems the best from a profit and feasibility perspective.

Sal

My dad has a home in Union City in the Bay Colony community. This area is still having upside as it is cheaper than Ardenwood plus we have the potential Tesla and Facebook expansion close by.

While folks do say it is easy to make more money in midwest, with more volume comes more expenses and less of things in your control. It will take a lot more of your time. If you are the accidental investor which is my guess,  its not worth it. I would not assume more than a 10% long term return in mid west with minimum appreciation. You will easily get that return in your union city home over time.

My advice, don't sell do a refinance cash out and put that money in crowdfunding or in real estate close to you. If you don't need the money now who cares.

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