Refinancing my old primary (now a rental) for cash-out

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Refinancing my old primary (now a rental) for cash-out

Ben Layman
Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes

Hi everyone! I'm new to this community and this is my first post here :)

I have a question I was hoping you guys could help me with.

I have built up quite a bit of equity over the years paying down and renting out my prior residence. This was my first house and the neighborhood I bought in has really taken off. It's been cash flowing between $500 -$600 per month over the mortgage since my fiance and I moved out in November 2018. I thought about selling it and using the cash for something else but but I'd rather do a cash-out refinance and keep the property because I put a lot of money into re-doing the HVAC, painting, bathrooms, landscaping etc. I'd like to capitalize on those investments for a little while longer. My goal is to use the cash as a downpayment for more single or multi-family homes and increase my revenue stream. I reached out to my lender about doing a cash out (Wells) and they said they are not doing any cash-out refinances right now because of the market.  I also asked B of A and they said they can't lower the rate and it wouldn't make any sense to re-fi. So is my only option to move it over to a commercial loan and have to re-finance every 5 years, plus pay the higher interest rate?  (Side note; i have another separate rental property that i have a commercial loan with and it's a 5yr fixed/25yr amortization with a 4.95% rate.)

Here's all the information on the house and loan.

Current Loan with Wells Fargo principal balance: $139,672

Conventional 30yr loan that started in Feb 2012

Property estimate value $312,000

Interest rate 4.125%

Monthly mortgage: $1,160 (includes principal, interest, taxes and insurance)

Monthly rent: $1,700 (Tenants are in a 1yr lease that expires February 2021)

Would love any advice and to hear what you guys think! Thanks! 
-Ben


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Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
6y

If I ran my numbers right your payment would go up by at least $400 if you did the full $95,000 cash out, leaving your cash flow at something like $140 a month, which is pretty measly in my book.  Plus, you would be refinancing with an investment property surcharge since it’s no longer  your primary residence.... and then there are the refi costs which are likely to be $2,000-3,000 perhaps.  

I would probably think about selling it outright to extract the equity and buying 2 additional (cheaper) properties with the proceeds. You would end up with more ROI and be getting appreciation on two properties instead of one.

Or, not doing the full cash out so your monthly net is better if you are going to keep it.  

Randy 

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  • Nicholas Covington
    Mortgage Broker · Dallas, TX · Member since 2017 · 657 posts · 275 votes
    6y

    What state?

    1Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    If I ran my numbers right your payment would go up by at least $400 if you did the full $95,000 cash out, leaving your cash flow at something like $140 a month, which is pretty measly in my book.  Plus, you would be refinancing with an investment property surcharge since it’s no longer  your primary residence.... and then there are the refi costs which are likely to be $2,000-3,000 perhaps.  

    I would probably think about selling it outright to extract the equity and buying 2 additional (cheaper) properties with the proceeds. You would end up with more ROI and be getting appreciation on two properties instead of one.

    Or, not doing the full cash out so your monthly net is better if you are going to keep it.  

    Randy 

    2Reply
  • Account Closed
    Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @Ben Layman

    For starters, where are you located? $1700 in rent on a $312,000 property is not great. You could probably grow quicker (with more cash in your pocket) if you just sold that sucker!

    1Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y
    Originally posted by @Nicholas Covington:

    What state?

    Virginia 

    0Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    @Randall Alan

    Thank you for the reply!  I have thought about selling because I won't get hit with a tax since i've lived in it 2 out of the past 5 years... i still have 2 years to figure it out. 

    1Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Ben Layman:

    @Randall Alan

    Thank you for the reply!  I have thought about selling because I won't get hit with a tax since i've lived in it 2 out of the past 5 years... i still have 2 years to figure it out. 

    Good point.  Always be aware of tax implications.

    The refi til you die and brrrr strategies don't cover the pain of the refi enough. Even if it's an option, the costs is high and qual process tough. 

    Simplest path of course is to bank your cashflow and save for your next purchase organically. How's that going, Ben? 

    0Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    Good point.  Always be aware of tax implications.

    The refi til you die and brrrr strategies don't cover the pain of the refi enough. Even if it's an option, the costs is high and qual process tough. 

    Simplest path of course is to bank your cashflow and save for your next purchase organically. How's that going, Ben? 

    Its' going great so far but I only own two rentals. One is my former primary (mentioned above) and the other is a house rental i bought right next door to my primary in 2014, before the neighborhood exploded. Richmond Va is a weird place in that home valuations seem to be very high right now but the rents are around $550 - $600 per bedroom.. which makes a 3br/2bth around $16k - $17k.  It's hard to find investment deals here that can cash flow for the long term. I got lucky buying in a neighborhood before it got popular. 

    I have about $70k saved that i really want to put towards either another couple of houses, or just keep saving as much as I can and buy an apartment building. I think most multi-family buildings would go for $1-$1.5mil here.

    Anyone know if this is possible to do using a conventional loan? I have 2 years of W2 income making $85k a year and I think I can save up $200k in cash if I sell the property i mentioned above. I don't have any debt other than the mortgages which all have at least 30% equity in. 

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    6y
    Originally posted by @Ben Layman:

    Good point.  Always be aware of tax implications.

    The refi til you die and brrrr strategies don't cover the pain of the refi enough. Even if it's an option, the costs is high and qual process tough. 

    Simplest path of course is to bank your cashflow and save for your next purchase organically. How's that going, Ben? 

    Its' going great so far but I only own two rentals. One is my former primary (mentioned above) and the other is a house rental i bought right next door to my primary in 2014, before the neighborhood exploded. Richmond Va is a weird place in that home valuations seem to be very high right now but the rents are around $550 - $600 per bedroom.. which makes a 3br/2bth around $16k - $17k.  It's hard to find investment deals here that can cash flow for the long term. I got lucky buying in a neighborhood before it got popular. 

    I have about $70k saved that i really want to put towards either another couple of houses, or just keep saving as much as I can and buy an apartment building. I think most multi-family buildings would go for $1-$1.5mil here.

    Anyone know if this is possible to do using a conventional loan? I have 2 years of W2 income making $85k a year and I think I can save up $200k in cash if I sell the property i mentioned above. I don't have any debt other than the mortgages which all have at least 30% equity in. 

    Excellent job saving so far!

    Moving from singles to multis is a big step. They are different animals.  I have both but don't think I'd go all-in on it.  I'd stick to residential if that's working well for you.  Commercial loans are risky and a pain I have found.  

    1Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Ben Layman I do like the idea of selling.  Have you lived in the property in 2 of the last 5 years?  If so, you can use the capital gains exclusion.  If not, then 1031 is an option.  In either case, you have to calculate your return on equity and I bet yours is pretty darn lousy even if you do refi.  Think of this home as the one that launches your amazing real estate career!

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    1Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    @Whitney Hutten

    Thanks for the advice. 

    I have lived in the house 2 out of the past 5 years, yes. I did a home sale calculator and i think i can get about $144k in profit out of the house by the time I sell it in a year. 

    Do you guys think it's faster to build a revenue stream by buying up multiple, cheaper out-of-state single family rentals that make you on average $230-$280 month cash flow, or to go all-in on a multifamily unit that makes more but cost a lot more up front?  

    0Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Ben Layman Oooohhh! Then I would think about selling (since the rental numbers aren't that great). Talking the $144K (tax free) and investing in multiple properties. Originally, I had rentals in CO... abysmal cashflow. When I moved to invest out of state, I ~5x my cashflow. It's a tossup on the SFR/MF for me. I like the scale of MF because of scale, but your cashflow per door goes down, you are more concentrated in one area (buying right is then soo important) and you will have a much different tenant. With SFRs you can spread out the risk more, but I'd suggest to hold several so you have some sort of scale to your portfolio. A happy medium is holding nice duplexes...

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    0Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    6y

    Well, right now lenders are all up in a tizzy over COVID.  I think I'd wait until stuff sorts itself out and you'd get a better rate/terms.

    I'd also talk to a mortgage broker since they look at all rates not just their own like banks do.

    0Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    @Whitney Hutten thank you for the great advice! I think i'm going to sell the house in a year... seems like the best option. I really want to free up all that equity to spread out across more rentals, instead of just sitting in one and making only $450/mo.

    0Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Ben Layman Sounds like a plan!  FWIW... this summer could be a good time to cash in and buy.  We know what home values are now (so you know what kind of equity you will walk with), and rates are super low so you can lock that in as well.  It is a little hard to qualify.  In either case, I wish you the best of luck!

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    0Reply
  • Matt Nico
    Member since 2019 · 448 posts · 306 votes
    6y
    Originally posted by @Ben Layman:

    Hi everyone! I'm new to this community and this is my first post here :)

    I have a question I was hoping you guys could help me with.

    I have built up quite a bit of equity over the years paying down and renting out my prior residence. This was my first house and the neighborhood I bought in has really taken off. It's been cash flowing between $500 -$600 per month over the mortgage since my fiance and I moved out in November 2018. I thought about selling it and using the cash for something else but but I'd rather do a cash-out refinance and keep the property because I put a lot of money into re-doing the HVAC, painting, bathrooms, landscaping etc. I'd like to capitalize on those investments for a little while longer. My goal is to use the cash as a downpayment for more single or multi-family homes and increase my revenue stream. I reached out to my lender about doing a cash out (Wells) and they said they are not doing any cash-out refinances right now because of the market.  I also asked B of A and they said they can't lower the rate and it wouldn't make any sense to re-fi. So is my only option to move it over to a commercial loan and have to re-finance every 5 years, plus pay the higher interest rate?  (Side note; i have another separate rental property that i have a commercial loan with and it's a 5yr fixed/25yr amortization with a 4.95% rate.)

    Here's all the information on the house and loan.

    Current Loan with Wells Fargo principal balance: $139,672

    Conventional 30yr loan that started in Feb 2012

    Property estimate value $312,000

    Interest rate 4.125%

    Monthly mortgage: $1,160 (includes principal, interest, taxes and insurance)

    Monthly rent: $1,700 (Tenants are in a 1yr lease that expires February 2021)

    Would love any advice and to hear what you guys think! Thanks! 
    -Ben


    Hey Ben,

    Usually I am a hard "No" on selling properties you already acquired just because its usually pretty difficult to figure out the financing, but that $140k you would get does sound appealing. Especially if you are going to turn that cash into 2 more properties.

    If you are going to keep that property, your other option could be a HELOC. Try to pull 70k out or something and go shopping for another property. If your market is so bad that its hard to cash flow I would try out of state.

    Either way you want to go it sounds like you are extremely responsible with your finances, and you probably couldn't go wrong either way.

    Good luck,

     -Matt

    1Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    Hey guys - I heard back from my portfolio lender on their terms if I wanted to go with refinancing route instead of selling my old primary residence that's been rented out for a few years. Would love to hear any advice you have @Whitney Hutten @Steve Vaughan @Matt Nico - you guys have been super helpful so far! This would be moving my 30yr conventional loan currently at 4.125% with Wells, and moving it over to my portfolio lender thus turning it into a 5/25yr commercial loan. 

    These are their terms:

    Terms for $233,000. (75% loan to value)

    Rate 3.97%

    60 month term/300 month amortization

    Payment = $1,233

    Org. Fee = 1%

    With taxes and insurance added into the monthly payment, the total would be: $1,525 - making my monthly cashflow $170. 

    I manage the property myself, so if I were to hire a company I would reduce my cashflow down to $5 whole dollars. 

    Even though that $233,000 is tempting, i'm still leaning towards selling it and making around $140,000. Any money I did get, whether it was from selling or a re-fi, would all go towards buying out of state and trying to cashflow more. Any advice you have, please throw it my way! 

    0Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    Cash flowing $170 is really paltry compared to your current cash flow.  Alternatively, the cash flow you are getting now is pretty good for a single door... and you are making better progress on your loan than you would if you reset it at 30 years on new properties - albeit with a lot of appreciation equity tied up in the property.

    So it is a question of sell or keep, but definitely not refi at the values you listed. 

    By selling you also eliminate all the other hassles... maintenance, tenants, etc... which at $170 a month wouldn't be worth it in my book.

    The question probably comes down to how well you could cash flow elsewhere.  I can usually pick up $75,000 properties for under $30k and cash flow $300-400 a month at least.. usually more.  Using that as a benchmark metric, you could potentially buy 4 cheap houses, and be cash flowing $1200-1600 per month, instead of your $500-$600.  You will build equity and gain more appreciation in 4 properties versus the one, but will also incur the management / repairs / maintenance of 4x the properties as well... so there are definitely more overhead costs associated with spreading out your money across multiple properties.

    I think you just need to run the analysis for your area, and do the math to see how much more you would make.  In my book, buying multiple properties would be the way to go... but let the math lead you.

    Randy

    1Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    @Randall Alan Thanks for your reply, Randy. Some helpful insights! 

    Just curious, how are you able to buy $75,000 properties for under $30k? Do you mean that you put $30k down? Or that the price you're paying is $30k and you're putting $6k down? I think what you mean is that you're buying at $75k house, put $15,000 down, then put another $15k into renovations, then rent it out and make $300-$400/month cash flow? 

    So, even though i'd been getting $233K, you don't think a re-fi to the 5/25yr would be worth it at all? I would think that earning an average of 14-15% cash-on-cash return from that $233k would more than make for the fact that i'm loosing $370/month by refinancing. Plus, it frees up one more spot (out of my 10) that i can do another conventional 30yr term for a lower rate on another property. It would suck to be getting $170/mo instead of $540/mo, but if i sold it, I would only be getting $140,000 at the most, as opposed to refinancing and getting $233,000. 

    All that being said, i think the question is, should i sell it or refinance it? All that appreciation being tied up in equity that I could be using on other properties isn't really helping me if I just keep it and do nothing. I'd like to grow my business and expand into other markets. Very helpful to get other's perspectives.

    0Reply
  • Randall AlanPro Member
    Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    I buy them with financing... so paying $75,000, but with closing it takes cash out of pocket for under $30,000

    0Reply
  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Ben Layman If you refi, your cashflow is still not good...  However, you would have cash in hand back to invest elsewhere and now employing other people's cash to paydown the debt for you.  If your goal it to accelerate and grow, I would still think if selling.  Rentals are meant to house people not money.  If you are wanting to have properties paid off quickly and have other capital sources to build your rental portfolio... then you could do something different.

    Podcast Guest on Show How to Build Generational Wealth Without Losing it Along the Way
    0Reply
  • Ben Layman
    OP
    Rental Property Investor · Richmond, VA · Member since 2020 · 38 posts · 15 votes
    6y

    @Whitney Hutten - thank you for your insight. I'm going to follow the pros advice and sell the house. My goal is to accelerate and grow by investing in other markets, and although it seems like so much more cash immediately if I do a refinance- I'm going to follow your advice and sell. Thank you for your help!

    0Reply
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