Should I take a cash out from all paid property

Question

I wish I would have discovered this website earlier.  There is so much information and everyone is very helpful.

Here is my situation:  
I became landlord about 6 months back.  I bought my first property as all cash deal.

I paid 105K for a duplex which is generating about $1200 in rental income every month.

Now I got my feet wet and I have been thinking about getting couple more properties for rental. I have about another 100K saved for my next rental properties.

Question 1:   Should I do a cash out refi on the rental I already own?

Question 2: I have been offered 5.00% 30 year cash-out refi with 2K closing cost. to take out 75K from the property I own.      Do you guys think 5.00% is a good rate for investment property?    Can you please suggest some investor friendly banks?

Question 3:    Should I try to spread out my 100K cash savings on down payment of multiple properties or just buy 1 property and pay cash?

Please let me know of your opinion.

J Scott · Answer

What would you do with the money?  What would your return from that investment be?

David Schweibish · Answer

I know I'll sound like a trained parrot on this one, but definitely take advantage of cheap money from other sources (banks, desperate/willing sellers, etc.) in this economy.

Warren Buffett has said it for decades, and I'm getting VERY close to tattooing it across my chest.., "be greedy when others are fearful, and fearful when others are greedy". My dear BP'ers, be very greedy now, and indeed the payoff shall come in due time!

Account Closed · Answer

I think it really depends on what you are looking for as an Investor. If I was in your shoes, I'd be more attracted to lower risk and higher cashflow. I feel that owning the properties outright strongly mitigates your risk and stress should you experience a vacancy or other issues with the property.

Not knowing your complete financial picture, I'd just say you need to decide if you want the cashflow more or more of a speculation on appreciation. If you don't have much money into the deals, your cashflow typically is negative or only a few hundred a month at best.

I'd leave the original property alone and use the $100k I had to invest into a property that meets (or close to) the 2% 50% rule and cashflows. I'd pool the cashflow off the first property with the newly acquired property cashflow into your property savings account and maybe contribute some more money yourself and buy a third property with cash again in a year or two. Keep snowballing the cash like that and buying property outright and before long you'll have a hell of a cashflow situation with minimal risk and still have the classic real estate apprecation on your side over the long haul.

You just won't have a high "Return on Equity" figure, but for ME I'd be happier with paid off properties and a steady stream of cashflow (that you can reinvest in new properties and also pay for regular maintenence of the property to help keep the property value up). You won't be hurting if the market goes down because you won't ever be upside down on those properties. Overleverage is what got us into this mess anyhow.

I may lean too much on the conservative side, but if you have a strong cashflow and you aren't having to inject personal money into the deals each month then you can hold onto the property indefinitely and reap the rewards of property appreciation over the long term.  If properties are costing you $-100/door each month, you will be out of business sooner rather than later.  Being an accountant, I really just don't ever like the idea of having too much risk and I certainly don't like the idea of a negative cashflowing company for the hopes to sell higher later down the road.  That's just a recipe for disaster because if your personal financial situation has a bump in the road, you could be neck deep in a matter of months.  Build the business so that financially speaking, it can continue regardless of you staying employed or not.

Just my two cents and I know a lot of people will disagree with me and thats ok.

Daniel

Bill Gulley · Answer

That's cheap cash at 5% if you can get it. Remember too, your alternative break even will need to only yield 4% maybe less, since your loan interest is an expense, so after tax it costs you 4% maybe less.

At 100K, I would suggest you spread it around. While you don't have you cash tied up in bricks and mortor, look into making transitional funding available to other investors, you might find that an annualized yield of 30 or 40%, you don't want as many properties. Good luck, Bill

DAVID GAGE · Answer

I would use as little of your own cash as you can. Banks in my area are being really tight right now so if you can make the numbers work I would re-fi.... IMO

Michael S. · Answer

with the market at an all time low, buy as many as you can, but try to buy in an "up and coming" area

Should I take a cash out from all paid property

Most Popular Reply