Cash out re-fi to get second prop but no gain on rental?

Question

I want to pickup a second property, I am sold on the book, the method, I am learning so much. But I live in Seattle and houses are 600k. My current house is worth 650k, and I owe 404k on the loan. I don't have enough money down to put 20% on a new house, so I need to do a heloc, or cash-out re-fi. I want to pickup another rentable place that is say worth 600k. The money situation worked out like this:

New loan payment on Seattle house goes from 2300 to 2900 a month, 4 bedroom 2 bath houses are renting for 2900-3000 a month around where I live (3 miles from microsoft).

I pickup the new house payment at around $3300 a month, something I can afford and will put some sweat equity into to force appreciate it a bit over time.

The question I have is, does this seem like a deal worth doing? There is essentially no cash flow to renting out my house, other than the loan paydown, and appreciation.

I purchased the house for 450k, owe 404k now and the appraisal just came in at 650k. So even if there is no positive cash flow I essentially get paid 3k in equity a year assuming that holds to rent the house, while picking up a second home in the process.

Does this seem like a bad deal, am I crazy? It's hard to come up with 20% down when the crap shacks are 600k, but this is the market I live in.

Troy Fisher · Answer

Why not roll your 401K into a Self Directed 401k and use it to purchase or loan $$ and make greater Returns on it now?

I also think that Ames Lakes, Duvall and Fall City are going to be on the uptick for Redmond Individuals, as Parkplace gets redeveloped we are going to see a surge of Eastside Tech Boom and people wanting to live outside of Seattle City Limits.

With the influx of tech coming to Downtown Seattle, there is not going to be an employment down tick for a decade unless M$ and Amazon go belly up.  With Google, Facebook and Apple moving into downtown (and the Eastside) be prepared for prices not to slow down.

Brent Coombs · Answer

@Rob Deweese, I agree with Lane Kawaoka. Sell, then buy the worst house for the lowest price (the one with the most unrealized potential, for value adding later) in your chosen area closer to work/school with your $200k deposit, and then later, go the HELOC route to BRRRR the best compromise-properties your research arrives at between distance, neighborhood appreciation play, and rent returns. On $250k per year, you should be achieving your goals! All the best...

Rob Deweese · Answer

Julian can we sync? I sent you a linkedin invite, we live close to eachother. I would love to hear your perspective, coffee on me?

Julian Buick · Answer

@Rob Deweese another option is to get a HELOC on your primary residence (you can get 80% LTV) and use it to invest with local rehabbers on fix and flips. You can make up to 20% annualized return doing loans or higher for joint ventures. That's what I've been doing and it's working out so far. That way you don't have to deal with being a landlord. No investment strategy is without its risks and you have to find the right people to work with or you could get screwed. Best of luck.

Jiri Vetyska · Answer

Rob,

Just a heads up, refi with cash out will be very strict, completely different experience than regular refi. Plus, refinance takes regularly two months.

HELOC on the other hand can be much quicker and you may be able to get much lower rate (which is adjustable, so time it wisely). And 120k is the average amount for HELOC.

Plus always remember use debt wisely, should the economy turn sour again, you'd loose everything.

Rob Deweese · Answer

Greg we should chat, want to meet for coffee? My treat?

Greg Harriman · Answer

Take a look at a house like 20429 Filbert Dr in Bothell.  I haven't run numbers on it but I'm pretty sure you're looking at a monthly rent of $1,900.  It may make sense to confirm it'll be within the new North Creek High School boundaries and when that opens I think you'll see rental rates continue to edge up from there.

In terms of your numbers, I rarely consider appreciation as part of my calculation but that looks reasonable, however, your closing costs are low.  You'll likely pay 1.5-2% (using companies like Redfin) and another 3% from the buyer's agent and then a bunch of fees (like a 1% fee that some cities charge to sell - i.e. - Bothell).

Good luck with the search and be sure to let us know what you end up doing!

Rob Deweese · Answer

The house is in redmond, was just using Seattle as an example for those not familiar with the area. Its in education hill zoned for a 10/10 public school. It's a 3 mile commute to microsoft which is where I work. I think that you all have a point to stay in the house I am at, but tap the equity to pickup a lower risk lower cost property at least as a first time purchase. I think that in the end the numbers are better in Bellevue assuming the market stays crazy, but corrections are due. And picking up something in Renton, or Bothell wouldn't take as hard of a hit. And honestly the houses in renton and bothell are in better shape in the 400k range, than the 600k crap shacks in bellevue. So repairs are supremely minimal. Its one of those things, money can be made, but how much risk. I think a first deal going with a lower risk to learn the ropes is maybe the best bet. Appreciate y'alls time.

Rob Deweese · Answer

Man just a quick search of renton using the burr strategy immediately adds 2-400 cash flow  a month based of the loan I would get. But the appreciation in renton is a lot lower, it's still 3% or so. But in a down turn it could suddenly be where people flock to that can no longer afford bellevue. Interesting point taken.

House 1 Renton Purchase 400k, 20% down 80k.

5 years at 3% appreciation loan 463,709.63 - 10 closing 453k.

Loan balance after 5 years is $288,869.

Equity 175k -80k initial investment - 10k closing cost = 85k

ROI = 48%

Not including rental income which honestly I would just use as a fund for potential problems, or leverage for another loan in the future.

Overall its a better ROI than Bellevue and does not require me to do a cash out re-fi making it a better deal. You made a valid point. Let me know if my numbers are off but I think you are correct.

Cash out re-fi to get second prop but no gain on rental?

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