cash out refi to raise cash for future opportunities

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cash out refi to raise cash for future opportunities

Fred Stevenson
Investor · Baton Rouge, LA · Member since 2014 · 142 posts · 49 votes

So I believe there are going to be a lot of opportunities in coming months to purchase assets at hugely discounted prices so cash will be king. So my question is this,  I have a number of rental houses that have significant equity. Right now my rental income pays for all my rental expenses including PI, taxes, maintenance, etc,  with money left over each month.  I've built up a decent cash reserve that could cover my expenses in the event that all tenants stopped paying for at least 8-10 mos.

I've heard some suggestions that it may be a good idea to do a cash out refi on some of these homes that have equity to have cash on hand in the event that some of these future opportunities crystallize (discounted homes, stocks, even opportunties in the beaten down oil industry).  The potential problem with this idea is that I would be increasing my debt (at very low rates of course). The rental income will still cover the additional debt payments, but, what happens if tenants start to disappear due to this poor economy? Then I wouldn't have the monthly income from rents to cover my new debt. Any thoughts? Did anyone do anything like this in 2009. 

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Nicholas Lohr
Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
6y

I actually don't know too much about that move. Is your broker a fiduciary? I would get a 2nd opinion on that one if I were you just in case. 

And back to the properties you own, you mentioned you don't have mortgages on them.  There's some threads on BP about Return on Equity.  Maybe check those out if you haven't already. 

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  • Nicholas Lohr
    Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
    6y

    From what you wrote in the first paragraph there it sounds like you're in pretty great shape! I think the questions are.... Are your tenants still employed and paying rent in the current environment? and,  Where are those tenants going disappear to anyway?

    I don't know all the specifics of what you have there but you said you have "rental houses" and I just can't picture some mass exit from those. If you had undesirable C class apartments or overpriced A class ones could be a different story. 

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Fred Stevenson, I would suggest a hybrid approach:

    1. Cash out refi up to 50-60% LTV to put some capital directly into play.
    2. Secured LOC or individual HELOCs up to 75-80% LTV to have additional funds at your disposal, if needed.

    This should still leave you with plenty of cash flow to cover anything unexpected. Should a great deal(s) come along and you need to tap more cash you have the LOC to do so. Even under this scenario you're responsibly leveraged.

    1Reply
  • Fred Stevenson
    OP
    Investor · Baton Rouge, LA · Member since 2014 · 142 posts · 49 votes
    6y

    Thanks for replies guys. I appreciate it. 

    0Reply
  • Fred Stevenson
    OP
    Investor · Baton Rouge, LA · Member since 2014 · 142 posts · 49 votes
    6y

    @Nicholas Lohr so far all my tenants are still paying rent. I don't have any mortgages at all on some of my properties, but combined I'd say it's about 40% - 50% LTV ratio. Most properties are in B neighborhoods. Two or three are in c's. Trying to sell a couple of the C ones.

    Other issue is that all these properties have titles held by LLC's so don't know how easy it is to get a HELOC Or cash out refi on them? It would be a hassle to have to do a quit claim deed into my personal name just to get cash out.

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  • Fred Stevenson
    OP
    Investor · Baton Rouge, LA · Member since 2014 · 142 posts · 49 votes
    6y

    @Nicholas Lohr and @Jaysen Medhurst . So I just uncovered a much better route. I just got off the phone with my broker who manages all my equities through Schwab. He told me I can borrow 40-50 % against the value of my stock portfolio that he manages for me and the interest rate is 1.5 basis points over the fed rate which is basically zero. Meaning my rate would be 1.5%. The interest accrues over time and I can pay back the principle or interest whenever I want. No fees. 1.5% annual interest rate no fees. Holy crap. I may have to borrow money this way and pay off some of my friggin mortgages that are sitting at 4-5% right now. Amazed that I never heard of this before. No loan applications, no closing costs, low rate. It is variable but will always be just 1.5% over Prime rate.

    The risks are if I borrow 50% and then my portfolio takes a dive then I would get a margin call, so to mitigate this I'll only borrow 20%. Other risk are rising rates, but they would have to rise a lot to hey higher than what I would get from a HELOC or LOC right now.

    What do you guys think?

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  • Nicholas Lohr
    Investor · San Francisco, CA · Member since 2015 · 302 posts · 206 votes
    6y

    I actually don't know too much about that move. Is your broker a fiduciary? I would get a 2nd opinion on that one if I were you just in case. 

    And back to the properties you own, you mentioned you don't have mortgages on them.  There's some threads on BP about Return on Equity.  Maybe check those out if you haven't already. 

    1Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    That's an interesting solution, @Fred Stevenson. You're basically borrowing your own money while being able to keep it in the market. I wouldn't worry too much about rising rates. They're going to be down for a while, especially if it's pegged to the Fed rate.

    As @Nicholas Lohr mentioned, ROE is important here (I'm usually one of the people screaming about it in the forums). What's your current ROE? How do you see that changing?

    1Reply
  • Fred Stevenson
    OP
    Investor · Baton Rouge, LA · Member since 2014 · 142 posts · 49 votes
    6y

    @Nicholas Lohr hey Nicholas. I don’t have mortgages on three of them. I do on seven others

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