Cash out Refi vs Sell Question

10 Replies

Hi! As an investor, what is the value of Cash out Refi vs Selling.  I understand that I do not have to pay capital gains tax on a cash out refinance.  So to that point, why wouldn't I cash out refinance, grab that equity, tax free. And then sell some time later where I already have the appreciated equity at a tax free rate? I am guessing there is something I am missing, but I can't seem to understand why wouldn't everyone do that.

Hey Marcus, not too sure about the tax-free part... I haven't done much research on that, though, so it may be tax-free. May want to verify with an accountant to make sure you're not left holding the bag.

As far as why do one vs. the other - everyone has their reasons. Maybe a cash-out wont get them all of the money they need, and the house won't cash flow after it, so it makes more sense to sell and move on. They could do a 1031 to defer taxes as well.

Gary Keller says don't sell the goose that's laying the golden egg. If you have a great house that's doing well and want your money out and can do a cash-out - that is a great option!

@Marcus Hill , A refi cash is not taxable true.  But debt does not determine your profit when you sell.  Your profit will still be the difference roughly between what you sold it for and what you paid for it.  So cash outs are not a path to tax free profit.

But a cash out on a strong performer that doesnt' hurt it's performance is a very strong move.  Because when it is time to sell later you can still defer all the tax simply by selling and doing a 1031 exchange.  In the meantime the tax free refi let's you continue to reinvest and capture the good returns of the current property.

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Sounds like you're testing out the BRRRR method. Have you looked into that? If not, you should.

I'm not sure where you got the info about tax-free income when you sell, but that's not the case. You'll have long-term capital gains and depreciation recapture in the vast majority of circumstances. When you're ready to sell, you should reach out to your accountant to have them run some numbers for you so you know what type of potential tax bill you'll be looking at.

With a cash-out refi, your max LTV is 80% on a 1-unit primary and 75% on a 1-unit investment property, so you won't be able to tap into as much equity as you can by selling the home. If you are able to profitably hold the property AND tap into enough equity for it to make sense, a cash-out refi is a no brainer in my opinion.

Personally I'd refi. If you would rather scale up and not keep the property then sell. If you want to utilize the equity, rent that property out and hold, refinance

@Marcus Hill

I hope all is well with you. I had to make this choice early this year and I went with selling. Normally, I would say that you should always try to cash out refi instead of selling. The reason I sold, was due to the fact that I couldn't obtain all the equity I gain in the property, unless I sold it. 

For example, I purchased a four unit for $199k, and put $25k into the property. Appraised at $283k, a year and half after we purchased it. The mortgage was $196k roughly at time of appraisal. Bank will only give me 75% of the total value, which would only allow me to refi $216k. I would only be able to cash out $20k. However, I was able to put it on the market and sell it for $283k, and pocket $57k after fees. I turned around invested that cash into a five unit for $250k. Gaining a unit and increasing my cash flow. 

At the end of the day, you have to run the numbers to know which one you should do. I wasn't planning on selling the property, but the market jumped and I took advantage. 

Let me know if you would like to chat more about my experience or real estate in general.

Beleza,

Charles Anthony

@Marcus Hill

There is a ton of reasons why everyone does not want to tap into their equity as you described. 

  1. Its not their business model, they are flipping properties at this moment
  2. They don't want to own any property long-term with debt
  3. They don't want to be landlords
  4. Fearful of losing everything if the market takes a major downshift

I love the BRRRR strategy and I'm more in line with your thinking. The main takeaway is that there are a plethora of ways to be successful in real estate, which is the beauty of it. Figure out your strategy, plan a course of action, and go for it, evaluate, adjust if needed and keep moving forward. You have to find the way that fits your investment objectives, follow that path but also be open to new ideas.

Best Regards,

    Originally posted by @Reid Chauvin :

    With a cash-out refi, your max LTV is 80% on a 1-unit primary and 75% on a 1-unit investment property, so you won't be able to tap into as much equity as you can by selling the home. If you are able to profitably hold the property AND tap into enough equity for it to make sense, a cash-out refi is a no brainer in my opinion.

     Incomplete. short sighted math

    @Marcus Hill

    I’ve bought 8 properties from doing cash out refis. I love tapping equity from my properties to scale up. It’s like buying houses for free. Refj til you die! Hold onto all your properties. Don’t ever sell unless you 1031 it. Good luck.

    You're correct about the tax-free part on refinances, since the government views it as a loan and not income.

    When cashing-out equity, you're capped at 80% of the value. When selling, aside from realtor fees, you're getting the full value.

    If it's cash flowing well, I'd say cash-out the equity, not have to pay taxes on it.

    Everyone is in a different financial situation, however.