Cash-out to reinvest?

Question

Hey Everyone,

I am pretty new to investing and would love to pick your brains. I currently have a 16unit that's paid off, and family operated with good cashflow. My question is, should I pull out some equity and use it as a down payment in another property? or do investors pull cash out and pay if off completely? I was thinking of pulling out between 200-300k. Looking to purchase another multifamily between $1-1.5MM.  Thanks in advance!

Greg Scott · Answer

Of course your property has good cash flow, but your Return on Equity is almost certainly terrible.  Moreover, a paid-in-full property is always a nice target for an ambulance-chasing lawyer.

By doing a cash-out refi and buying another property, you should be able to increase your combined cash flow, get your Equity working harder for you, and make your property less attractive for a lawsuit.

I would go this route.

Michael Scott · Answer

Seems like you are off to a fantastic start! If your goal is to scale and get more real estate, then tapping into the equity is a great way to start to scale your business. Just make sure you're not over leveraging the property that will kill your cash flow. Best of luck!

Michael Dumler · Answer

@Christian Orellana, you need to identify your goals. If your goal is to continue building your real estate portfolio, pulling equity out of the existing investment to acquire a new property is certainly sound and a tactic many investors employ. This is a subjective question and is based on one's position and goals. That being said, recognize your return on equity is minimal. Moving forward, if you decide that growing your portfolio is necessary and a goal of yours, then ensure that your next deal is properly analyzed and sound underwriting is performed. Hope this all makes sense and helps! Feel free to reach out if you have any additional questions.

Jared Hottle · Answer

There is a lot of ways you can do it. Cash out refinance is one. Could also use your building as collateral to get another loan so you do not have to bring a downpayment. Also could probably get a version of a Heloc secured by the commercial building, pay cash for a property fix it up and refinance that one. Definitely talk to local banks in your area. All will have a different way they do business and figure out which one meets your goals the closest.

Evan Polaski · Answer

@Christian Orellana, while the typical answer is almost always "yes", you need to look at the returns you can realistically obtain out of a new deal.  If your mortgage is going to cost you 6% interest, and deals you are looking at will only kick off a 5% return, you are negative leverage and better to NOT refi and reinvest.  If you flip those numbers, then it makes sense to refi and reinvest.

There could be a scenario that the 6% interest and 5% current return still makes sense, assuming there is room to add value to the existing property and move your 5% in place to say 8% stabilized, and put you back into positive leverage.

Christian Orellana · Answer

@Michael Dumler my parents bought back in the 90s. Now just I’m trying to continue their Real Estate portfolio

Michael Dumler · Answer

@Christian Orellana, connect with a brokerage that specializes in small multifamily acquisitions. Present your criteria and let them know you're a serious/motivated buyer with cash on hand. The small multifamily investment space is extremely competitive which is why you need resourceful vendors working for you. How'd you acquire the first property?

Christian Orellana · Answer

@Michael Dumler Thanks for the response. Yea the idea is to continue to build a portfolio. To be honest i find it difficult to find properties that can help increase my cash flow.

Cash-out to reinvest?

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