Should I cash out refinance?! HELPPP

36 Replies

Hey all, i need some help. I want to get into real estate more. I have a rental property that rents exactly what I pay for the mortgage. The bank is willing to give me upwards of 90k in a cash out refinance. The interest rate will be almost the same either way but Should I do the refinance to take this money out and reinvest it???? Any help would be great!!

Nick

@NIcholas Hamel if your current property barely breaks even I would not recommend taking out cash to reinvest. Instead, think through why you have that property. Could you sell it and re-invest the 90k in equity? Could you hang onto it as an appreciation play and find cash elsewhere? This is a get rich slow game for sure, so be careful not to over extend yourself. 

@John Warren thanks for the response. good point. I figured i might have to take a slightly higher mortgage payment in order to free that money up. I bought in 2013 for 375k and in 2018 it was appraised for 525k. I was very fortunate because this is a high demand town because of its proximity to NYC. prices are constantly rising here so im a bit scared to sell it off

@NIcholas Hamel You're in a good situation and didn't give up any cards yet. You can't time the market but you have to agree we are near the top. NYC will be affected more if prices dip. I would leverage the property to have funds available when the time is right (great deal). Are you looking in other markets? Can you find better cashing flowing properties?

Thanks for the insight @Jaron Walling So your saying the cash out refinance is the way to go? I have been looking in a few areas that I am familiar with and trying to educate myself as much as possible on the local market

@NIcholas Hamel The REFI is a smart option. What are the numbers on your property? Are you at market rent? Any value add to opportunity? If the market is strong in the spring of 2020 you could sell at top dollar, stand on the sidelines for a bit, and jump back into a new property with better cash-flow! Nothing wrong with that plan. 

@Jaron Walling I break even with the rent i receive. My interest rate when i bought in 2013 was 4.5%. Im told the rate is currently around the same for an investment property. I briefly spoke to a lender and The bank would lend me roughly 90k in the refinance.

@Dillon Dale . Thanks for the advice. This property is in a highly desired area and the prices keep going up. Does that change ur perspective or would you still sell? I bought for 375k in 2013. It was appraised in 2018 for 525k

@NIcholas Hamel don’t kill the golden goose. Instead look for a way to leverage your equity especially if you want to own that property 10+ years from now if it’s in a highly desirable area. Refi if you can easily afford the cost to do that or you could consider getting a Heloc.

Originally posted by @NIcholas Hamel :

Hey all, i need some help. I want to get into real estate more. I have a rental property that rents exactly what I pay for the mortgage. The bank is willing to give me upwards of 90k in a cash out refinance. The interest rate will be almost the same either way but Should I do the refinance to take this money out and reinvest it???? Any help would be great!!

Nick

Nick, 

Whatever you do or hear, do not refinance this property now. 

That'll be a terrible idea. 

What you should do is try to maybe save and buy another property, and this time you have the wisdom of hindsight to buy better. 

Take your time! Real Estate Investing, in order to be successful, is a long term play. 

@NIcholas Hamel I agreee with @Ola Dantis that a refi is not wise especially with the property already not cash-flowing and a high dti. And honestly, if that’s the case focus on getting your dti to a better ratio, otherwise you greatly increase your risk. Be patient, find a way to increase your income and start knocking down your debt asap. You can sell but only you can decide if that’s what you really want to do. A property in a prime location is very hard to acquire and even harder to hold on to. Continue to educate yourself and focus on increasing your income. Investing more can always be done after you have a stronger financial foundation in place. My $.02

I agree with those saying don't REFI. With 150k in appreciation, that's some solid equity. I certainly agree with what @Jaron Walling said, holding till Spring/Late Winter of 2020 and selling. Between now and then you can continue to save more money and research other markets so when you sell, you're prepared to invest in that new (or same) market at a better ROI. Hard to tell what the market will do, but at break even income, an economic downturn can result in vacancy or needing to lower rents where you'd lose money. 150k+ can go a long ways in other markets.

@Nicholas Hamel

I am not saying this to indicate this has been a poor investment because it has not been. You have achieved $150K of appreciation on an investment that likely was <$80K (using 80% LTV). That is very good.

However, if your rent is the same as your mortgage payment, you are not breaking even.  Over the long term you are significantly cash flow negative.  Research the 50% rule.  I suspect for near New York city it is a bit conservative but still gives some reference to what maintenance/cap expense, vacancies, miscellaneous, etc. add up to.

If you refinance, the RE will be more cash negative than it is now.  This is not to imply that I would not refinance.  Leverage magnifies appreciation.  If a property appreciates 10% over an interval, the rate of return on the equity is directly proportional to the Equity percentage.  Example, if a property appreciates 10% over an interval and the owner has 20% equity, the owner has a return of 50% over the interval on the equity from the appreciation.  However, the same 10% appreciation only is a return of 20% on the equity if there is a 50% equity position.  If there is a 100% equity position, the 10% appreciation returns 10% on the equity.

So if you are in appreciating market, you are far better off holding two properties at 25% LTV than one property at 50% LTV. Basically two properties at 25% equity will double the return from appreciation of a single property at 50% LTV.

Here is the big however …   You want to be sure that you are not overextended.  The RE investors who do poor in long term appreciating markets (almost the only RE investors to do poor) are those that are overextended and have to sell when the market is down.  Do not be one of those investors.

So do you have the assets available that if you refinanced and leveraged your resources across two properties to survive (not need to sell) something like a Great Recession?  if you do, refinance and use the leverage to increase your returns.  if you do not, then take the safe route and let the long term appreciation work its magic on your RE.

Good luck

@NIcholas Hamel

I would say go for it. I did a cash out refi in June and so happy I did. Bought a property for 135k cash I used from the cash out. I fixed it up and placed a tenant in it for $1,1675/month. It'll appraise for 200k now and my bank will let me take out 70% out for a 15 year note at 3.85% with one point. I'm making an offer tomorrow on a SFR I will BRRRR and plan on doing more and more. If the numbers work, then why not!? Good luck and let us know what you end up doing!

@Dan Heuschele you are spot on. To OP, if “breakeven” means your rent received and mortgage are equal, then Dan took the words out of my mouth. And don’t refi in that case.

If "breakeven" means you're setting aside 20-25% for CapEx, maintenance, vacancies, and rent is also paying for PM fees, but there is no "profit per door", then it matters if you're under market rent and reasonably think you could raise on renewal or after turnover. If this is true, then I would only refi if you have access to a consistent dealflow and you could close on something within 60ish days of refi.

If you manage it yourself, and aren’t paying yourself to do so, then my .02 would be no refi and save elsewhere.

Good luck, and let us know what you choose!