Pandemic rate...cash out refi?

Question

So my first property after reno and rented has been giving decent cashflow after expenses. Pandemic rates so I always said a refi is out of the question. However I'm back in the game trying to buy a second property. Now I'm reconsidering doing a cash out refi and use the cash for funds to reinvest. The refi calculator quote has the property still cashflowing after. Rate would almost triple but it ideally will continue to pay for itself and then some. Any advice or thoughts?

Jaycee Greene · Answer

Hey @Rashad Ellis! How would the refi affect your projected return on the property? And what metric are you focusing on? My clients usually look at either IRR or EMx...

Stacy Raskin · Answer

It can make sense to refinance if you are going to deploy the cash to earn you more money. You can do either a conventional loan if you would like to qualify off of personal income and debt to income ratios (DTI) ratios or you can do a DSCR loan where the loan will be structured off of the property rent and not your personal income. DSCR loans are also less paperwork.

Generally rents go up long term so if you can still continue to cash flow after the refinance and you have a smart plan for how to make your cash work for you to build more wealth, a cash out refinance can make sense. I have clients who have turned one property into many by using the cash out refinance strategy to use the cash out from the cash out refinance as a down payment for another property and continue the same strategy to build from there. Happy to connect to discuss further.

Nate Herndon · Answer

There's a fair amount of pros and cons to consider - but given that a cash-out refinance is the way to access equity in a property, a 30-year fixed DSCR loan would be the answer to tapping into that.

Personally, I don't think it's always an apple-to-apples consideration. If you "only" owe 50% LTV and have a 2.5% rate, the only fair comparison is comparing the 2.5% rate with (for example) a 6.50% rate at the same dollar amount.

Here's my logic on scenarios like this with an example:

• Current Property value: $200,000

• Current Loan balance: $100,000

• Current rate: 2.5% 30-year fixed

• Current P&I payment: $466.24 (based on estimated original loan balance of $118k in 2020)

• Future loan balance: $150,000 (75% cash-out)

• Future rate: 6.50% 30-year fixed

• Future payment on $150,000: $948.10

• Future payment on original $118,000: $745.84

So the example payment on 2.5% is $466, and the new payment after the cash-out will be $948 ($482 difference). However, the original loan balance was $118,000, and that's the amount that you're really refinancing and paying more on here - so the dollars that you borrowed at 2.50% are being replaced by a 6.50% at a $279 increase ($745 - $466 = new payment on $118k minus old payment on $118k).

This may seem like semantics, but it's how I would reason this. You can't compare a $118,000 original loan at 2.5% with a $150,000 loan at 6.50% because the dollar amounts aren't the same.

So, instead of viewing this as a $482 payment increase, I'd ask the question (in this hypothetical) as to whether or not a $42-45k cash-out ($150k minus $100k current balance minus closing costs) is worth a $279 increase on the original $118k you borrowed. Personally, I would pay $279 more per month for a new property in the portfolio.

Now with all of that said, I'd be happy to connect and take a look with you at your specific deal. The numbers have to make sense for you and your portfolio!