Refinancing my home. Cash out?

Question

Hello all. My name is John. I live in Muscle Shoals, AL. My wife and I are refinancing our home to take advantage of lower rate. We were on a 15 year fixed with the goal of paying it off by retirement (I’m 48). After reading Rich Dad Poor Dad, BRRRR, and listening to BP podcasts, I’ve had a paradigm shift in thinking and chose to do a 30 year on the refi with the goal of freeing up money with the goal of building capital. My goal is to purchase 3-4 unit rentals or SFR to start with. The rate for our refi is 2.85%. We are debt free except for mortgage. We owe 131k and house appraised last week for 194k. We haven’t signed papers yet. My question is, should I just borrow the amount I owe and start saving OR, is it wiser to borrow as much as possible on our house? I hate to add back what I’ve already paid down since this is our home but, I do want to get started with rentals as soon as possible. Any advice is appreciated. Thank you, John

Joshua D. · Answer

@John Colagross

Good Job on being financially savy and having margin in your life!   Do you have other savings? What's the 401k or IRA look like?

Well I might be a bit of a contrairian here on this site but I love having equity in my homes. Full equity is even better!

However with that said finding seed money to start is so important.

What I would do in your shoes in find a local credit union (or bank) that would do up to 90% ltv HELOC and Barrow the 45k they would give you.

Then I would use that 45k to get on the BRRRR wagon.  I'm not sure what price point your looking at but in Alabama I assume that 45 k would just about pay cash for a starter rental. When your done reahbing it you would want I. To be worth 70k+ range and rents north of 750 or 800.

Don't deal in price points or rents lower than this as they are usually duds. The goalin the next few years would be to get to the $1000+ per month rental Range as that is a better place to be.

BRRRR is such a powerful tool.

What I like about the Line of credit is that it forces you to buy deals that will have enough equity to get it all back (via refinancing) so you can pay off your line and do it again.

Finally, good job on having a goal of 4 properties.  If your crazy out of your mind determined, I'm sure you'll have them bought and making you money in the next year or so and off to a great start on your first 1 million income producing net worth.

Good luck and remember to enjoy the process!

John Colagross · Answer

@Bob Norton

My current rate is 3.85 on the 15. I’ll be dropping it to 2.8 on the 30 and yes, it dropped to 2.25 right after I locked at 2.8 ha ha. I’m not sure if dropping the rate a point was really worth the closing cost but I wanted to lower my monthly payment to help, along with flipping cars, to save up for my first BRRRR. Thank you for the advice.

Michael Logan · Answer

@John Colagross Hey John, welcome to Bigger Pockets!  I live in Florence, AL and I grew up in Muscle Shoals, so let me know if you want to meet up.  You got some great advice already.  HELOCs are great.

Personally, if you can afford the payment, I would do a maximum cashout refi (75-80% depending on the lender).  I say this because we likely have huge inflation coming soon, and I would want to lock in that super low rate instead of a variable rate with the HELOC.  I just did a 75% cashout and then got a HELOC on top of that.

Redstone Federal Credit Union does HELOCs on your personal residence up to 100% LTV ( I just did this) and they pay for the appraisal.  No closing costs at all for you.  But, not just anyone can become a member, check out their website.  If you don't qualify at Redstone, First Southern Bank (Trent Jordan) or Listerhill Credit Union may be a good option.  At Listerhill, Stacy Aldridge is a good loan officer for personal residence, and Russell Allen is great for the business side.  Dee Dee Kilby at Integrity Mortgage Group seems pretty great so far too (I haven't closed yet).

Send me PM and I'll be happy to help any way I can!!

Aaron W. · Answer

@John Colagross Bigger Pockets has the calculators that can walk you through the analysis process and know what numbers you need to get an analysis completed. Before or sometime after analyzing a few deals, criteria should be established of what you want and what constitutes a great deal. Think about the cash flow, cash on cash return, etc. This will allow you know when you find the great deal to pursue.

Good luck!

John Colagross · Answer

@AJ H.

Thanks for the advice! I actually meant to say I planned to start with Triplex and Quad. I called it 3 to 4 unit rentals which made it sound like I only wanted 3or 4. My goal is passive income so I plan to rinse and repeat.😉

You mentioned “analyze, analyze, analyze”. Any tips on learning to do this?

John

John Colagross · Answer

Thank you for the advice! So here is more info. I didn’t mean to say my goal is 3-4 rentals. What I meant was my goal is to get triplex and quads. I figure I’ll have to start with a single family or two to begin with though. I was advised to do nothing smaller than a tri if possible. I have made a few friends locally who have a lot of apartments and rentals and this was their advice. I like the HELOC idea. One other thing too. I am a Branch Manager at a large credit union. Our HELOCS are of course no payment until money is taken on the line.

I also have a $40k line of credit that I use to flip cars. It only has a 4% rate with an annual $250 fee. (It’s with a local bank).  My goal is to utilize the LOC to buy cars, flip them, save up capital until I find the first investment property. Since we are going through the refi though, I wondered about getting the cash out. I like the HELOC advice though. Thank you. Now I’ve got to find the deals.😊

Bob Norton · Answer

@John Colagross You didn't mention what your current interest rate is on your 15-year fixed mortgage.  Refinancing to a 30-year fixed mortgage will free up some cash flow and you can always decide to pay additional principal to pay it off in 15 years anyway.  Take a good look at the refinancing costs of the new loan.  With small decreases in your rate, the refi costs may not be worth it, even if they roll it into your new loan. (That's why I asked about your current rate).

I agree with @AJ H. and @Joshua D. that a HELOC may be your best option.  This will allow you to free up the equity in your home to invest using the BRRRR strategy.  You do not have to borrow against the HELOC until you need the funds and you only pay interest on the outstanding balance while you are executing the BRRRR.

When you refinance the BRRRR then you can pay down the HELOC and repeat the process.  Using a cash-out refi on your home will lock you into the mortgage payments for 30-years and will not save you any interest between BRRRRs.

Good luck!

Theresa Harris · Answer

Others have given good advice.  You want to do what you are comfortable with, so if having equity in your home is important (and there is nothing wrong with that), then don't pull out all of the equity.  Talk to your loan officer about borrowing for a rental and see how much you can borrow for that mortgage.  Also look at properties online to see how much they are selling for and how much they are renting for.  then run the numbers to see if they make financial sense.  Don't forget to include property taxes and insurance along with maintenance costs.

Aaron W. · Answer

@John Colagross Welcome to the community and taking this awesome journey!

Before you begin, what are your ultimate goals with real estate investing?  You want the 3-4 rentals, then what? How do you see real estate getting you to this goal? Are you looking for cash flow or appreciation? Do you need the cash flow now?  What is your appetite for rehab?

By doing a cash out refinance, you will be able to take out the equity and start investing it. The downside is if you do not have a property in mind to put that money to, then you are paying the new mortgage now.

As @Joshua D. mentioned a HELOC could be a great tool for you to use in your current situation. The nice thing about the HELOC is you only need to make payments when you use the funds. Also, most of the time, they are interest only payments during the time of the HELOC. This will allow you to not have to pay for a new loan and still use your equity. Plus, you will be able to pay off your mortgage as scheduled.

Financing is an obstacle that can be overcome as long as you can find a great deal. There are options out there whether through hard money, private money, investors, or partners if you focus on finding the great deals.

If you haven't already, I would figure out for yourself what makes a deal a great deal, then analyze, analyze, and analyze. This is an invaluable tool to become a successful investor.

Good luck with the journey! Enjoy the ride!

Refinancing my home. Cash out?

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