Refinance & pull cash out to buy?

Question

Hey BP,

I have two properties paid off in NJ. I'd like to keep buying in this particular market, because I have a great deal going with my agent and they cash flow well.

My question is, do I keep them paid off, and collect straight cashflow, with a lower ROI, or do I refinance, pull out the cash ($120,000 each), which is about 25-30% of the value.

With that cash, I could buy 6 more. With rates being very low, it would be nice to capitalize on this opportunity.

Thank you for your input!

Jesse

Jesse Richardson · Answer

Thank you all for your responses. I appreciate it. That's whybi was thinking too, but after consulting friends, who dont own rentals, they all said to maintain as I am with the rentals paid off and buy one by one.

John Cornelius · Answer

Hi Jesse, as long as the rates/terms of the re-fi loans are favorable, I say go for it. One of my properties should qualify for 80% LTV on a cash out re-fi but now since COVID only qualifies for a 70% LTV, while the NOI is unchanged!!

Brandon P. · Answer

Re-financing to buy more properties is a great long term plan as long as you do not get over your head and run out of money doing it.

Ask yourself the question, in 20 years, would you rather have the cash flow of 2 properties now or 8 properties that have appreciated and are cash flowing.

Evan Polaski · Answer

@Jesse Richardson almost everyone will say to refi your equity and use the cash to buy more.  I generally agree with this for people that want to continue growing their capital, and in many ways it is actually helping reduce your risk, since you will go from 2 to 8 units so a single vacancy doesn't effect the portfolio as much.

The only caution I can add is make sure when calculating your cash flow, both on the existing properties taking into account your new debt service, and the new properties, that you truly are keeping enough in reserves. You could have 8 water heaters or roofs go out in a short period of time.  While this is generally unlikely, I have had several large repairs hit in close proximity, and it hurts when you have to write $10,000 worth of checks in the matter of a month and a half.  Even worse if you don't actually have the cash available.