A danger of rapidly increasing home vaules...the cashout refi

52 Replies

Originally posted by @Bonnie Low :

This is a great conversation so thanks for starting it @Mike Terry. My opinion is that there are several key differences between the flurry of refi's now vs during the housing bubble. One is that lenders have significantly tightened up their standards. Whereas before we were seeing refi's based on 100%+ of the home's appraised value, today we're seeing 70% - 80% on the high side which means a sizeable equity stake remaining in the properties and the ability for the homeowner to weather a 20-30% price drop if the market suddenly tanks. So, they're less likely to be underwater or significantly under water in a downturn. Appraisals themselves are much more strict than they were during the bubble. Drive by appraisals were common. Lenders didn't really care too much about the value of the home because they knew they were going to bundle the loan with other sub primes and sell it. A lot of banks got stuck with under water properties which forced short sales. They're not anxious to repeat that so the entire system is more conservative than it was during the bubble. Also, I'm not personally seeing a lot of people doing cash out refi's to buy luxury items and finance vacations. Most people remember 2008 like it was yesterday and either got burned themselves or watched their neighbors or parents get burned from those frivolous decisions. As one previous responder already said, many are using the money to improve their homes and there are many, many, who are using the cash out to fund their next real estate purchase. In my book, that's a much more solid investment than a luxury item. And we're in the middle of the pandemic which has people operating much more cautiously with their money. Another difference is that many people during the housing bubble were getting into adjustable rate mortgages and that bit them hard. I don't believe there's a lot of that going on right now. Finally, here's one other thing to consider - there is a school of thought which I happen to subscribe to - which is the debt itself can be the asset. With interest rates this crazy low and inflation what it is, it makes a lot of sense to take out fixed, long term debt at these rock bottom rates. If you don't use it, your dollar is losing value every day to inflation.

Thank you for your thoughtful response!!!

 

@Mike Terry Seems like everyone commenting here thinks people will do the smart thing and use the cash out refis to buy an asset and not a liability.

Hate to break it to everyone, if you are betting on the majority of people picking the smart, rational, financially savvy route you are going to lose. The sad truth is that most people are not financially responsible and will use that cash out to fund a lifestyle purchase and when the market does turn they will have not increased their income or the value of their home. The majority of people aren’t on BiggerPockets, they don’t read Rich Dad Poor Dad, they don’t keep budgets, and they definitely don’t make the right financial decisions.

So should investors cash out and purchase property or increase the value of their asset yes. But will normal everyday Americans, I will vote no and someday that chicken will come home to roost.

I'm doing nothing but paying off my Hillsborough county property and will be purchasing a very few number of things very strategically.  I don't buy at the top of the market and we're there right now.  What's pushing this further is pandemic shutdowns in other states, Florida's open for business philosophy, and the new capacity for remote work.  I just don't know that everyone who thinks they want to live in Florida REALLY wants to live in Florida.  When the dust settles I suspect North Carolina is going to do very well from those who've decided the heat, bugs and gators are a bit much.

@Mike Terry I think your observation is thoughtful and quite forward looking. I agree with @max ; so long as .... your cash out refi is not over leveraging you or the property and your rents are a able to cover the new debt device AND your are able to cash flow AND there is enough room for a reasonable rent decrease then —- Why not take advantage of a good thing? looking at it from this lens with the understand that you will be building a cash position to acquire additional ASSETS which will increase both your cash flow and net worth — this is much different than dangerously over leveraging (i.e. 80+%LTV, minimal cash flow, unrealistic rents, weak cash position l, etc.) or using the cash for non-asset related activities or just blindly taking out cash without a plan. It's just different level of cautiously and wisely using the current climate to your advantage while reasonably protecting your principal.

Interesting conversation - As a Utah native, even if a correction does happen, my home town wouldn't be affected nearly as much. We have a massive housing shortage as all the west coasters are moving inland buying up all the cheaper (to them) western state houses for cash. Our market has exploded and the forecast looks like this will be the norm for quite some time. Every other day I see local news reports on how extreme the housing crisis is in Salt Lake county which has migrated to all of northern Utah, I see this is common all over the western US. I'm in the process of pulling a little cash out of my primary to finish my basement to turn it into a mother inlaw apartment, should rent for $1400 with a 60k investment. Be cautious but don't become stagnant.. if a correction happens, it won't be 2008. 

Thanks for the conversation!

@Mike Terry it is funny you mentioned this. We are refinancing a property that we put under contract just as covid hit. We had some rehab delays, which delayed us refinancing the property.

That said, the property is now worth almost $100k more than what we thought the ARV was last year. We are able to turn this into a larger cash out.

Unlike your average consumer, we are excited about being able to buy more properties moving forward.

I was a mortgage broker in 2008 when the party ended. Definitely not fun. We might see a little of that today but I hope it will not be to the same extent. If it is, then that just means more buying opportunities for investors.

@Zachary Davison please don’t think I’m against using home equity either by heloc or refi for real estate investing... I’m not. I am only concerned about the overall economy and a rapid feeling of a wealth effect and the possible consequences.

Originally posted by @Travis C. :

I think the concerns of the author are missing one key ingredient for a massive bubble to burst - there is no exotic debt out there as in the mid-2000's.

----------------------------

Collateralized Loan Obligations (CLOs) are the CDOs of the early 2000s.

I agree with the people who say that it all depends on what you do with the money -- to a point. People pay rent out of income, so a wrecked economy -- CLOs blowing up, etc. -- that hurts your tenant's income hurts you, too.

 

I share the same concerns, especially on people doing cash outs on single family, non rental properties. My focus is multifamily, and most investors in this category (I hope at least) are savvy enough to save most of the money for future acquisitions and keep some reserves. I think plenty of single family investors are savvy in this way as well. 

I do worry about the folks overleveraging to spend on boats and vacations and so on. I don't think this is 2008, but it is an issue. 

Originally posted by @J. Mitchell Bernier :

@Mike Terry Seems like everyone commenting here thinks people will do the smart thing and use the cash out refis to buy an asset and not a liability.

Hate to break it to everyone, if you are betting on the majority of people picking the smart, rational, financially savvy route you are going to lose. The sad truth is that most people are not financially responsible and will use that cash out to fund a lifestyle purchase and when the market does turn they will have not increased their income or the value of their home. The majority of people aren’t on BiggerPockets, they don’t read Rich Dad Poor Dad, they don’t keep budgets, and they definitely don’t make the right financial decisions.

So should investors cash out and purchase property or increase the value of their asset yes. But will normal everyday Americans, I will vote no and someday that chicken will come home to roost.

Agree with all of this. 

 

I’m doing a cash out right now and will put it all towards my next buy. People have been saying this since 2015 when I started. Glad I didn’t listen.

Originally posted by @Andy Nathan :

@Mike Terry it is funny you mentioned this. We are refinancing a property that we put under contract just as covid hit. We had some rehab delays, which delayed us refinancing the property.

That said, the property is now worth almost $100k more than what we thought the ARV was last year. We are able to turn this into a larger cash out.

Unlike your average consumer, we are excited about being able to buy more properties moving forward.

I was a mortgage broker in 2008 when the party ended. Definitely not fun. We might see a little of that today but I hope it will not be to the same extent. If it is, then that just means more buying opportunities for investors.


Andy!  How are you man.  Haven't talked to you in like what 5 years?  Glad to see you're back in the game.

 

Originally posted by @Tim W. :
Originally posted by @Andy Nathan:

@Mike Terry it is funny you mentioned this. We are refinancing a property that we put under contract just as covid hit. We had some rehab delays, which delayed us refinancing the property.

That said, the property is now worth almost $100k more than what we thought the ARV was last year. We are able to turn this into a larger cash out.

Unlike your average consumer, we are excited about being able to buy more properties moving forward.

I was a mortgage broker in 2008 when the party ended. Definitely not fun. We might see a little of that today but I hope it will not be to the same extent. If it is, then that just means more buying opportunities for investors.

Andy!  How are you man.  Haven't talked to you in like what 5 years?  Glad to see you're back in the game.

Tim,

Doing awesome! Started investing again about 2-3 years back with a friend. Sent you a connection request. How are you doing? 

 Andy

 

Tim,

Doing awesome! Started investing again about 2-3 years back with a friend. Sent you a connection request. How are you doing? 

 Andy

Awesome. Got tired of land lording and code enforcement so I sold everything Indiana and moved to Florida. Found law schools were dealing with a historic low enrollment so I got a JD at 60% FMV. Doing consulting work now and pretty much landed the lifestyle I was looking for in RE. Working 1-2 days a week (if that). Lots of sun. Relaxing. Moving very slow in RE. The trick to Florida is to buy in an area right after it gets hit by a hurricane and people get big insurance checks then make emotional decisions not to return and decide to cash out. Panhandle might still be that way right now.

Tim

@Mike Terry nothing wrong with cashing out the gain if you use the cash on a productive investment. If you are paying 3.5% on your loan and making 10% this is a good move whether or not the house you borrowed against went down in value. Using debt to fund personal spending is always a bad move whether the value of your house goes up or down.

@Tim W. That is awesome! Glad you were able to create the lifestyle you want. Still working on mine but getting closer.

@Stephen Keighery I wasn't suggesting there was anything wrong with what you are talking about ie reivesting eauity in cashflowing properties.  I was refering to the consumer market and what the result will be from easy highly levered homes as homeowner feel the wealth effect of unsustainable housing gains.  I am feeling the wealth effect and I am a conservative budgeter.  Imagine the careless reckless consumer. I gave up predicting the future a long time ago, but there is potential for pain here.