Cash out refinance vs sell

[Gabriel Barrero]

I am in the process building a investment company while working full time in the Army. I'm basically starting an LLC for tax benefits. My current property (which was my first)I purchased as a short sale for 136k 3 years ago. I currently owe 123k and my house is currently worth 190k. I have renters in the house now. I'm debating refinancing to get cash in hand to purchase another rental vs selling out right. I'm very torn what is the best decision. I'm a newbie in the game and want to see if anybody else has shared the same experience.

[Scott Hollister]

Hello @Gabriel Barrero, 

There are a few options, hopefully these ideas will help create some creative imagination so that you can make the best investment for yourself.

1. Check with your attorney to see if setting up an LLC is the best option. If you plan on putting your property in it, it will likely trigger the "due on sale clause" if it is a conventional mortgage. Maybe not now, but possibly down the road. (Check local laws to see if you're making the right choice)
2. Option Refinance: 190k refi up to 80% LTV will leave you roughly around 152k. Pulling out 20k or so.
   1. I would recommend this ONLY if that money is going to make you money, that is if you find a higher and best use for it. 
   2. Downfalls for this strategy that might not seem like a big deal, but they ARE a big deal because the devil is in the details. 
      • You will most likely be paying closing costs, Im not sure on streamline but I doubt someone would do all the work for $0. So step one is make sure to be clear on the fees.
      • Step 2. Make sure your rental will still cash flow if you decide to refi. And THEN make sure it will still cashflow if the economy crashes and rent follows suit. 
      • Step 3. Think exit strategy, what if the economy crashes and your house goes back to 136k value? Now your stuck in the whole as far as resale goes. You bought right, keep it that way. (Short sale under market value)
      • Your loan will start a WHOLE new amortization schedule. So all heavily loaded insurance payments you made (Or your tenants) starts anew. 

Option HELOC: If you're just looking for quick capital, take out a HELOC for that 20k, you might even find a bank in your area that goes up to 100% LTV. (I did, but weigh out the risks, also the interest gets higher the closer you are to 100%)

1. Once you have that capital, then you can partner with someone or Hard Money. Typical HM is 15% purchase price, plus closing costs, and the lender will fund the rehab UP TO 75% of ARV. (Know the rates before you choose your lender) 20k

   (It's tight)

    is enough to buy a 100k house with an ARV of 175k. As long as you get it rented it in the 2nd month, that way your tenants pay that high interest only payment from HM. Pick a house that has a light cosmetic rehab if you can, its good to start small. (Have a reserve of 5k or more just in case)
2. Then you do a forced appreciation play. After the rehab is done, and you rent it (If buy and hold is your goal) then you can do a cash out refinance simultaneously paying off your lender and putting your HELOC money back. Then doing it over again getting houses for sweat equity.
   • There are more things to learn along the way. As for when you go for another loan you will have to have reserves for each of your properties. 

I think the debate here is the access to capital to do another deal. The question you have to answer: What is the best way I can access my capital AND reach my ultimate goals? (I'm assuming it is Financial Freedom)

Good luck Gabriel!