When is doing a cash out refinance not the best route to take?

Question

Hello all,

I am in the process of doing a cash out refinance.  In this process, I would be losing $200 of cashflow to pull out roughly $35K.  The property would still be cashflow positive with the lose of the $200. A year from now when the tenant moves out I could get that $200 back in rent when I renovate the other side based on the rent of the other side of the duplex.  The renovation would cost roughly 5K from $35k pull out.  Property currently cash flows $479 a month this would take it down to $279 temporarily.  I am in the growth process of my portfolio and do not need the cash flow for living at least another 6 years.  The cost of the refinance is roughly $9,000.  I would use the remaining $30k to add to other funds saved up and invest in another property.  I feel like this is decent just want to bounce some ideas.  If I don't go through with this refinance the current property could cash flow $679 in about a year with current rent rates.  Thanks!

Corby Goade · Answer

I am not a huge fan of the cash out refi unless you have a specific use for the money lined up. It's not really the change in cash flow that bothers me, it's a combo of the $9k in closing costs and the fact that you are paying interest on that money from the second that you sign off on the refi.

In my opinion, 90% of the time a HELOC is a much better option. Typically zero closing costs, often you get access to more equity and you don't pay any interest until you draw on your line. It's almost always less expensive in the long run and usually much less stressful. If you don't have a specific deal lined up for the cash you'd get in the refi, I'd do a HELOC instead.

Marcus Daniels · Answer

@Corby Goade Thank you for the advice. I will definitely look into the HELOC.  @AJ H. Thank you for the advice. I have a plan so just trying to factor in all options and get a  couple of other point of views.

Aaron W. · Answer

@Marcus Daniels A cash out refinance would not be wise if you have no plan for the proceeds that are coming back. The money will just be sitting in the bank or under your mattress collecting little to no interest that will definitely less than inflation (especially right now).

Other times a cash out refinance will not be suitable is if you don't want to take on additional debt or the new payment will take you cash flow negative.

It seems you have a goal of how you plan to utilize the proceeds of the refinance, so that is a good reason to do the refinance, but you will also want to look at all the other factors to make you final decision.

Best of luck!