When is the right time to refinance and cash out?

14 Replies

I have the opportunity to close on our first four-plex tomorrow! When is the right time or is there a minimum amount of time I need to consider before a refinance and cash out to invest in next property. Our goal is 20 doors in 5 years or less. Scenario: Purchase price 260,000 Loan amount 208,000- yes the cash required hurt me a bit... Property appraised @ 325,000 Current cash flow 400 after all mortgage, insurance and operating expenses Opportunity to raise rent with new lease terms for additional $400, which could lend to $800 per month cash flow. Given this scenario and that I have a 25 year amortization with floating rate when would you refinance?

The banks I deal with all require 6 months of seasoning before they will cash out on appraised value. When you do it, beyond that, depends on whether or not you have identified a use for the money.

Eddie,

If the property is located in the state where you live, you should be able to find a community bank that offers portfolio lending with no seasoning and refinance cash out based on fair market value.  I have been recycling the same down payment funds for several years to build a large portfolio of SFRs.

@Eddie Sorrell  


What would that refinance do to your cashflow? If it drops it to a number below the ROI you could get elsewhere... why not sell it and take the profit + reinvest in optimal returns?

Just throwing some other options out there to pressure test your intent! Cheers sir

@Elliott Elkhoury That is a very good point. It would likely hurt my cashflow and since cash flow is what I am after your point is a very good one. Sell and do a 1031 for another property or several that may significantly beat the cashflow of this one property?

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@Eddie Sorrell that's basically what NPV or Net Present Value is... put simply, what's the average (or desired) ROI I get on my dollar, and how much above or below that ROI target is every asset I invest in. You want to land above it as much as possible!

I would def say sell for another property and extract the entirety of your equity if the ROI on this property is going to drop below your target number and you can do better elsewhere. There is a seasoning period required before you can 1031, and you may not have owned this property for long enough? I can't imagine the capital gains will be a hefty bill on this though, so talk to a CPA on how to minimize them.

I've thought about Kentucky a bit for cash flow, maybe you can share some expertise about high rent:value markets? My ideal property is market value around 60-90k, market rents for 850-1150.

@Eddie Sorrell The amount of seasoning required depends on the bank. As far as when: whenever you have the equity and money for closing costs. I'm basing that answer on your goal of scaling.

Thanks Account Closed so your approach would be to pay down the debt and then look at scaling once the current property is paid down? 

As anew investor be very carful assessing the cash flow on a income property. Dead equity will kill your cash flow if you place any value on your money at all. With a opportunity value of 10% 100K in dead equity is worth $833/month. If mortgage interest rates are at 5% you are immediately losing $414/month in come from your rental income. The reason leverage is so important is because buying cash flow is not financial prudent. Way too expensive.

Specific to this property, having a value of $325K, for this to be a worth while income investment will require rental income in the range of 3K per month. If not then long term you do not have positive cash flow. This number will need to be adjusted up to account for a return on dead equity as well.  

Provided you meet these number a recession will have no impact due to leverage. It is nice to have so much money that you can aford to place no value on it however ultra conservative all cash investors must understand they lose income every monty they own a property.

Usually 6 months minimum, some banks like to see more time to ‘season’ the property

Thanks @Thomas S. I am nowhere near $3k monthly rent roll on this property. The max the market will allow is around $2800.

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