Cash Out Refi Strategy for Acquiring Rentals

[Jimmy H.]

I'm close to completing my second flip, I just listed the property on my local MLS when I had an idea:

Why not cash out refi for more than I have in the property.

I bought the house for $40k in cash, I have less than $70k in it and it is worth about $95k.

At 75% LTV, I can cash out $71,250.

So, If I buy the houses right (cheap enough) and can fix them up for less than 75% of the appraised ARV value, why not cash out refi until I have the max number of mortgages and maybe even get paid to purchase homes.

Most cash out refi's require that you've owned the property 6 months, will loan at a max LTV of 75% and my lender will even include 75% of the rents in your DTI calculation if you can simply show a lease. With rates so low, PITI is rarely more than 75% of monthly lease, so DTI is never a restriction.

You can only have 4 mortgages traditionally, but new rules allow you to have up to 12 if you can hold sufficient reserves (6 months PITI for each).

I know it takes a bit of cash/capital up front to get started as I have been buying and renovating with cash. But has anyone pursued this strategy?

Anything I might be missing? Seems like I could potentially get paid to amass a portfolio of 1-4's.

[J Scott]

You do realize that you'll need to pay monthly P&I payments on this money -- it's not free. You'll also need to pay loan fees and closing costs at the time you do the refi.

So, if you're still planning to flip, you'll have more cash in your pocket until you sell the property, but your total profits will be reduced by the loan/closing costs and the monthly payments.

Now, if you're planning to hold/rent the property instead of reselling, that's called landlording, and it's pretty typical for a landlords to refi their properties to pull some cash out. The big issue you need to consider is, if you're generating enough cash from rents to cover expenses and monthly payments, you'll be losing money every month.

If you're all in to the property for about $70K, you'll need about $800/month to break even on cash-flow -- if you're willing to wait 30 years to generate any cash-flow on the property, that's a fine plan, but your ROI will be tremendously low given that you'll need to be doing some work in that time frame to manage the property or manage the managers.

Now, if you can rent the property for $900+ and you don't mind the managing, it's a great plan for long-term wealth accumulation.

Again, this is what landlording is all about for many landlords.