Question: Tapping equity to cover down payment costs

[Justin Grant]

Hello all - I am a new investor with three properties under my belt so far:

1. My primary residence (Which I've owned since 2019)

2. My first SFR - (Acquired in April 2022)

3. My first STR - (Acquired in May 2022)

My cash is a bit limited at the moment following my first two acquisitions this year, but I estimate that I already have considerable equity in both the SFR and STR. With my single family, if I were to do a cash out refi now, I could access roughly $30k right now. (This property is cash flowing at $230 a month out of the gate). With my STR, I could access roughly $95k right now.

I'm interested in potentially doing a cash out refi on either of this properties to cover the cost of my next downpayment. Does this approach make sense? What are the potential drawbacks and pitfalls? In the case of my STR, how would a cash out refi impact my monthly mortgage payment?

Any advice you can provide here would be much appreciated.

Thanks

[Alex Breshears]

Hi Justin! I am going to agree with other responders and say to give the properties some time to get seasoned and performing well. Right now, many lenders are a bit leery of STR properties, and if these were just stood up a few months ago as STR's you likely won't have the income history a lender is looking for. Also - while there is equity existing currently, the real question is CAN you access that equity. Keep in mind, the maximum loan to value for investment properties is going to be much lower than your primary residence. Right now, cash out refi's are going to cap out at around 80% of the value of the property. Depending on the type of property your STR's are, that could mean looking at comparables around these properties versus an income based model for a commercial property.

As far as the impact a refinance will have - there are a lot of variables there. Unless you know what your rate and terms are now, and what you could get, no one can really answer that question.  Without getting too deep in the weeds on this question - consider the COST of refinancing and is it worth it to get the amount of capital you are trying to access. Getting your hands on 30k sounds great, until it costs you $6k-$8k in closing costs and fees for a refinance. Depending on where you are, taking on a new mortgage could also trigger your local municipality to reassess your property for increased value giving you higher property taxes as well. Some routinely do this yearly, while others wait for some event such as the transfer of the property or new liens being placed on the home to trigger a reset of property taxes. 

When tapping equity from your primary residence, realize the risk you are taking on. You are pulling capital out of your home for yourself and your family, to put into an investment property. Do you have enough capital to fall back on should that investment property not go as planned? What happens if after closing you find foundation issues? They ban STR's in that market before you are stood up? The market softens and you can't sell it without bringing cash to closing? Travel demand decreases and your occupancy and nightly rate decrease?

While we tend to live in a "more is better" society - I'm going to challenge that notion a bit and tell you that quality is better than quantity. Being overleveraged in a potentially down market cycle is the worst thing to do, and patience can be worth it to sleep better at night knowing you have properties that are performing well, cashflowing for you, and allowing you to build up cash reserves to buy another property. You can also always partner with someone else - you bring the STR management experience while they bring the cash for example. So you also don't have to go it alone!