Refi Til Ya Die Strategy

37 Replies

In this time of COVID I'm looking at purchasing extra property but am looking at getting the downpayment from cash refinancing properties. I listen to several podcasts aside from Bigger Pockets- Real Estate Guys and @Jason Hartman . I got interested in the concept of "refi til ya die" when I heard it on Jason's Creating Wealth podcast. 

@Jason Hartman

Are any of you familiar with the concept or deploying it? 

Summary of it is that you buy and hold rental properties for the long haul building weatlh through the cash flow, mortgage being paid and the appreciation. After some time you'd refinance higher than the original purchase price (being mindful of cash flow). This then would go to the purchase of a new property. Also, the cash refinance wouldn't be taxed so you'd be saving on taxes as well?

My understanding on keeping a high loan balance is that banks don't want to take the property back and would work with ya. In cases like COVID folks who have high loan balances simply went into forbearance. They don't want you to outright default. 

I'd love to hear folks thoughts on this. I've got a property in Houston purchased from 2012 and have a decent amount of equity so am trying to sort out this next move and the long-term play.

@Jason Hartman

@Mark-Anthony Villaflor , your tag did not work.  Yes, I use a number of Jason's strategies.  The refi til ya die (trademark) strategy is slow and steady, and has enabled us to pick up houses over the last decade. 

I have also listened to him for several years, and have attended several of his events...even brought my teenager to learn from Jason.  I particularly like his ideas, such as buying in laterally trending markets, and looking at the Rent to Value ratio, or the land to improvement ratio.  And the idea that buying a house = buying a basket of commodities. 

Originally posted by @Mark-Anthony Villaflor :

In this time of COVID I'm looking at purchasing extra property but am looking at getting the downpayment from cash refinancing properties. I listen to several podcasts aside from Bigger Pockets- Real Estate Guys and @Jason Hartman . I got interested in the concept of "refi til ya die" when I heard it on Jason's Creating Wealth podcast. 

@Jason Hartman

Are any of you familiar with the concept or deploying it? 

Summary of it is that you buy and hold rental properties for the long haul building weatlh through the cash flow, mortgage being paid and the appreciation. After some time you'd refinance higher than the original purchase price (being mindful of cash flow). This then would go to the purchase of a new property. Also, the cash refinance wouldn't be taxed so you'd be saving on taxes as well?

My understanding on keeping a high loan balance is that banks don't want to take the property back and would work with ya. In cases like COVID folks who have high loan balances simply went into forbearance. They don't want you to outright default. 

I'd love to hear folks thoughts on this. I've got a property in Houston purchased from 2012 and have a decent amount of equity so am trying to sort out this next move and the long-term play.

It's a lot more common than you think. To read these forums, you'd believe people just save up 25% down over and over again. That's rarely the case. A series of round robin cash out refinances has been much more common for the last 5 years or so.

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Hi @Anish Tolia,

It's been several years, hope all is well! 

That's an odd thing to say. This couldn't cause a crash in a zillion years. As well will agree, the causes are substantially different and far more complicated. My strategy requires a minimum of 20% equity at all times. 

That's the minimum, most investors will have much more equity than that over the years they are benefiting from the strategy. 

I thought the idea was to avoid selling and having to pay back all that deprecation you had claimed.  The cash-out refi gets you around that.  Couple that with some reasonable level of appreciation on top of some cash flow, with debt-pay down, and you are on your way.  Is there more to it?

In Houston, you can combine this strategy with flood zone properties - it's called 'H Town til You Drown'...

Originally posted by @Mark Sewell :

I thought the idea was to avoid selling and having to pay back all that deprecation you had claimed.  The cash-out refi gets you around that.  Couple that with some reasonable level of appreciation on top of some cash flow, with debt-pay down, and you are on your way.  Is there more to it?

 Didn't know you had to pay all the depreciation you claimed on taxes.... What happens at the end when you die and have all the debt? @Jason Hartman

Originally posted by @Jason Hartman :

Hi @Anish Tolia,

It's been several years, hope all is well! 

That's an odd thing to say. This couldn't cause a crash in a zillion years. As well will agree, the causes are substantially different and far more complicated. My strategy requires a minimum of 20% equity at all times. 

That's the minimum, most investors will have much more equity than that over the years they are benefiting from the strategy. 

I don't know about a zillion but people borrowing to buy houses they can't afford certainly caused a housing crash 12 years ago. And how many people with no mortgage do you see losing their house? I really think its an irresponsible message that is very prevalent on BP that leverage is the be all end all of everything and you have stretch yourself paper thin to build an empire. This strategy is highly risky and and unstable and depends on everything going well all the time. Sure you can use debt wisely in the early stages of building wealth. Its almost impossible to start out as a cash investor. But to retire with a highly leveraged portfolio scraping $100 per door while holding millions in debt is not a wise plan and can leave you destroyed at a time you cannot rebuild again. 

Originally posted by @Anish Tolia :
Originally posted by @Jason Hartman:

Hi @Anish Tolia,

It's been several years, hope all is well! 

That's an odd thing to say. This couldn't cause a crash in a zillion years. As well will agree, the causes are substantially different and far more complicated. My strategy requires a minimum of 20% equity at all times. 

That's the minimum, most investors will have much more equity than that over the years they are benefiting from the strategy. 

I don't know about a zillion but people borrowing to buy houses they can't afford certainly caused a housing crash 12 years ago. And how many people with no mortgage do you see losing their house? I really think its an irresponsible message that is very prevalent on BP that leverage is the be all end all of everything and you have stretch yourself paper thin to build an empire. This strategy is highly risky and and unstable and depends on everything going well all the time. Sure you can use debt wisely in the early stages of building wealth. Its almost impossible to start out as a cash investor. But to retire with a highly leveraged portfolio scraping $100 per door while holding millions in debt is not a wise plan and can leave you destroyed at a time you cannot rebuild again. 

I am not sure what thread you are reading.  Nobody here (that I see) has been advocating for stupid leverage.  No bank is going to allow you to do a cash-out refi for more than 80% in the best of times.  And you will be lucky to find one to do it for 65% now.  Maybe 70% if you really look great on paper.

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Originally posted by @Mark-Anthony Villaflor :
Originally posted by @Mark Sewell:

I thought the idea was to avoid selling and having to pay back all that deprecation you had claimed.  The cash-out refi gets you around that.  Couple that with some reasonable level of appreciation on top of some cash flow, with debt-pay down, and you are on your way.  Is there more to it?

 Didn't know you had to pay all the depreciation you claimed on taxes.... What happens at the end when you die and have all the debt? @Jason Hartman

 My understanding is that depreciation timer resets when it all passes to your kids or whomever as part of your estate.  They get to claim depreciation all over again, if I am not mistaken. 

@Anish Tolia Not sure how this got off on to another subject here. But @Mark Sewell is correct, we are simply advocating a VERY CONSERVATIVE approach where people buy and hold properties for 7 - 12 years and then refi at 80% LTV and then continue to hold them for life, or at least 27.5 years to finish the IRS depreciation schedule. It doesn't get much more prudent and conservative than that.

If you're listening to my podcast and YouTube channel, I have done hundreds of episodes on market cycles & crashes and interviewed nearly every thought leader on the subject. It's good stuff so please check it out, if you're not already listening. 

Ok, so lets do the math. Assumes you are using a SFR strategy to get to a retirement income. Lets say your magic number is 100K/year before taxes. And lets say you are buying 100K house at a 1% rule. And lets say you get 4% interest, 20% down. Lets also assume 50% rule for other expenses (to keep it simple). This is probably close to the type of turnkey property most people consider.

So based on the above your year one cash flow would be about $1400 or just above $100 per month. Now you can take the cash flow or you can use it to pay down the mortgage faster. If you put that extra 1400/year into the mortgage you pay it off in about 20 years.

So at year 20 (assume retirement) and 2% increases home value and 2% increase in rent you can either take the cash flow to retire or refi out and buy more property. Now the home is worth $150,000 and rent is $1500.

If you don't refi, your cash flow goes to about 9,000 per year. If you do refi at 80%, your cash flow is about 2000/year. The refi nets you 12000 cash which you can use as down payments on 4 more identical homes each netting you 2000. So now your total cash flow is about 10,000. So effectively the same.

But now if you want a 100K income you need 50 leveraged houses or 10 paid off houses. Which do you think is more likely to be attainable? 

This is a simplified illustration but the point is its easier and more viable to have a smaller number of paid of homes. At a much much lower risk and certainly less effort and headache.

Now you can argue about dead equity all you want but remember, we are holding this until we die so ROE should not even be a factor.

Updated over 1 year ago

Edit for typo. After refi you pull out 120K, not 12000. Also 2% appreciation is per year.

Valid points.

However it does ignore the effect of leverage on your invested capital (less risk but lower return).

So maybe it is open for each investor to find a happy medium, right?

You allude to something - we all get older and priorities change. You can start gradually dialing back the leverage, taking out lower LTV loans or not doing them as often. At some point, enough is enough and you just don't have the interest in buying more anyway.

@Mark Sewell when you die and pass a property to your children, they receive the property at the stepped up basis without inheriting the depreciation. It is basically like just buying the property and you start the depreciation from scratch or sell it and pay no gains. Of course keep in mind depreciation runs out. For a house after 27.5 years, you no longer get to claim depreciation. Say you buy a property at age 40, by age 67.5 there is no more depreciation and if you live to 80 or even 100, you are stuck paying extra taxes all those years. That is the main reason people use 1031 exchange to move up to another property that has depreciation to claim. You can definitely kick the can on taxes, but I guarantee if you own rental properties for 30, 40, 50 years, you will be paying lots of taxes. BUT you will also have acquired significant wealth.

One other thing people need to remember about cash out refinance is that mortgage interest destructibility follows use of the money. The interest on the cash out portion of the refinance is claimed against the property you purchase with the money. Be aware there is no tax benefit if you purchase no property - say for example you use the $50K to buy a sports car. In that case you cannot claim that $50K as a tax deduction against the property. Why does this matter? Cash out refinance reduces cash flow, but doesn't increase tax benefit. In other words for the property you take cash out of, your taxable income increases but your realized cash flow decreases.

I am not saying to not follow this strategy. I have two refinances in the works right now. I am just saying be fully aware of the tax ramifications and don't put yourself in a situation where you are over leveraged. 

@Joe Splitrock

Interesting analysis on the increase in taxable income but decrease in cash flow. That is correct when you’re only looking at the refinanced property since the interest is now being traced to new investments.

Some other factors to consider though on a portfolio level:

1. 7-12 years (more so on the latter) into a 30 yr mortgage you will start to feel the decline in annual interest expense.

2. New increased loan balance and new loan amortization will rejuvenate your interest deductions from what they were pre-refinance.

3. The newly acquired properties are essentially no money down. So each of them will have lower taxable income than if you had made the downpayment without refinance proceeds.

And then you have additional depreciation as well...

Originally posted by @Anish Tolia :
Originally posted by @Jason Hartman:

Hi @Anish Tolia,

It's been several years, hope all is well! 

That's an odd thing to say. This couldn't cause a crash in a zillion years. As well will agree, the causes are substantially different and far more complicated. My strategy requires a minimum of 20% equity at all times. 

That's the minimum, most investors will have much more equity than that over the years they are benefiting from the strategy. 

I don't know about a zillion but people borrowing to buy houses they can't afford certainly caused a housing crash 12 years ago. And how many people with no mortgage do you see losing their house? I really think its an irresponsible message that is very prevalent on BP that leverage is the be all end all of everything and you have stretch yourself paper thin to build an empire. This strategy is highly risky and and unstable and depends on everything going well all the time. Sure you can use debt wisely in the early stages of building wealth. Its almost impossible to start out as a cash investor. But to retire with a highly leveraged portfolio scraping $100 per door while holding millions in debt is not a wise plan and can leave you destroyed at a time you cannot rebuild again. 

 Not sure about all this. But I imagine if the governments keep printing money and devaluing the currency you'd be on the winning side, aligned with the rule makers. I'm trying to sort out the long-term plan. But I also imagine that my rents will go up to cover a lot of the costs and move me further up than a Benji a door. Of course, I'm not wanting to have this destroyed and rebuild. But I also don't want my assets to be destroyed in value because of inflation. Trying to figure out how to use debt wisely for sure. 20% as you mentioned seems reasonable enough. No bailouts for those that keep a high amount of equity right?