Cash out refinance or not?

[Jack B.]

Background:

-Male in late thirties.

-Own several rental properties in the Seattle area.

-Interest rate on currently primary residence/house is 3.25%, no PMI/MIP.

-Tax bracket is 32%.

-Mortgage payment is $974 a month including taxes and insurance.

-After principal pay down and tax benefits my mortgage cost to live here is $466 per month, +200 a month budgeted toward repairs and maintenance over time.

-Paying off the mortgage would save me only $204 dollars per month on interest.  Return on payoff would be 2% return on my money. Pay off amount would be $113,000 dollars.

-I bought the house for 11K down 7 years ago and it more than doubled in value.

-Peace of mind is a consideration having a paid off place to live. I am sitting on about 800K cash in high yield savings waiting for opportunities to buy again (can't find good deals right now). That said I could just leave the money in savings and pay the house off any time since I'm not blowing the money...Also note I typically save 100-200K a year from W2 income.

-The house needed a new roof a year ago at 13K and will eventually need new plumbing (galvanized), etc. So maintenance costs are coming up.

-The house was a primary residence then converted to a rental for 4 years and now back to primary residence for now though intention is to rent back out again and likely eventually sell to avoid additional maintenance.

-Cash flow if I rent the house back out is $1,000 a month + $300 a month principal pay down after ALL expenses including budgeting for capex, vacancy, etc. If I rent it out like this again it shows a profit and increases my taxable income....but then again it is nice to have extra money coming in every month from my most seasoned rental. Between this and the other rentals, including principal pay down I'm clearing 48K a year from 4 rentals, +10K a year set aside from rents for vacancy, capex, etc. I've BARELY ever had to touch this, most of my tenants are super long term and most of the houses are newer except this one.

-If I cash out refinance cash flow will be about $300 a month +$400 a month principal pay down but I will get 150K to add to my existing pool of money for buying opportunities, bringing me up to 950K cash. Cash out refinancing will help me reduce my taxable income.

-I've kept the house as a cheap place to live. It's not the best neighborhood but not a ghetto either, but is easy commute to down town Seattle. I will have other places to live that are relatively cheap in the 1.5K to 1.8K a month range that are existing rentals, but am considering buying a new place instead.

-I plan on selling this as a rental eventually and doing a tax deferred exchange (I've done this before with other rentals) but the strict time limits of the IRS rules make me want to cash out refinance while this is a primary residence so that I have cash from the equity that is sitting dead doing nothing, to buy when opportunities are present, not within the 45 day IRS rules to identify.

-I can cash out refinance it while it's a primary residence and make out well. But I lose my "cheap place to live". I paid off student loans when I sold my last house 2 years ago just because. I walked away with a lot of money and was sitting on over half a million dollars and figured, why not get rid of the debt that bankruptcy can never discharge. I drive a cheap used Yaris paid in cash. No student loans. The only debt I have is rentals and in one year I can pay all of that off or pay all but one off now. The primary reason for cash out refinancing is just to tap the equity and use it in my pool of cash to buy opportunities when they present themselves.

SO cash out refinance or not?

[Jack B.]

Originally posted by @Michael Haas:

@Jack B. - way to have a good handle on your financial situation. This is a refreshing change from the typically vague BP question, and I anticipate you'll get way better and more actionable feedback because of it!

My two cents: There's no reason to REFI if you don't have a place to deploy the cash, and since you said "I am sitting on about 800K cash in high yield savings waiting for opportunities to buy again (can't find good deals right now)" it sounds like you're not able to deploy that cash. I get 1.78% interest on my high yield cash savings (PM me if you want a referral link lol), and although that's pretty good its still significantly lower than current mortgage rates. That's not even considering loan origination costs, which will increase the spread there.

Sounds like you've done some house-hacks in the past. In my experience the favorable loan terms and low down-payments make those deals pencil even in markets where straight rentals do not. Have you considered doing another of those, and continuing to hold the vast majority of your nest egg in a safe but high yield account until more deals come available?

Cheers and good luck! We invest heavily in Seattle too, PM me if you'd like to grab a coffee and talk RE sometime. 

Thank you! Yeah the two things that are keeping me from doing it so far have been 1) not having a place to deploy the cash and 2) It would make this place a not so cheap place to live and fall back on when needed/wanted, etc.

That said, I'd much rather cash out refinance then use the money to buy more rentals at my leisure and sell the house for a single 1031 exchange property than having to find 2-3 rentals to deploy the cash to under 1031 timetables. I did that once and it was tight...

That said if I do cash out refinance it will give me an excuse to leave this place as it is a C neighborhood. Once I cash out refinance it will cost me almost as much to live here as my other properties. Oh, another advantage of the CO refinance is that when I DO rent this place back out, it will be a loss on paper once again, whereas without tapping that equity, it's a sizeable profit in my taxes. I made almost 300K W2 income last year so I'm in the 35% tax bracket (mistakenly said 32%) so I look for any opportunities to decrease taxable income, traditional 401k contributions, rentals that show as a loss, etc.