Hi,
I have about $340k of equity in my home that I'd like to put to work. I'm currently paying 3.625% interest on a 30 year fixed, and am considering taking out $250k in equity, which would likely be at a similar interest rate.
If I want to buy a rental property for $100k, but only put 20% down, how would I do this without creating another loan on top of the refi? It seems that if I were to get $250k out, I could just buy the house outright for $100k, but then there would be no leverage. Or would there be since the cash out refi loan is larger than the original loan on my property? I'm sure the cash out refi interest rate would be lower than a rental income rate, so I'm trying to understand the best way to go about this.
@Corey M. I think you are confusing yourself a bit with this post. If you pull money out of one deal and redeploy it, then that money is essentially out of the first deal. I don't count the leverage on deal 1 as part of the leverage on deal 2.
If I were in your shoes, I would pull as much money as makes sense (make sure you still cash flow) out of deal 1. This would allow me to then buy two or three more deals with financing in place. This will dramatically improve your cash flow and equity growth as compared to just buying one more house. In the single family world, just the appreciation alone can be a huge driver of returns and if you can pick up multiple properties then you can really grow your wealth.
@Corey M. I think you are confusing yourself a bit with this post. If you pull money out of one deal and redeploy it, then that money is essentially out of the first deal. I don't count the leverage on deal 1 as part of the leverage on deal 2.
If I were in your shoes, I would pull as much money as makes sense (make sure you still cash flow) out of deal 1. This would allow me to then buy two or three more deals with financing in place. This will dramatically improve your cash flow and equity growth as compared to just buying one more house. In the single family world, just the appreciation alone can be a huge driver of returns and if you can pick up multiple properties then you can really grow your wealth.
There are a million ways to do this. I don't like a cash out refi for your situation for a couple reasons; one, you will be paying interest on that "cash" the moment you close. What if you don't find an appropriate investment for six months or a year, or ever? That is a LOT of money to throw down the drain and would quickly eat in to any potential profits on the back side.
I like using a HELOC- they're flexible, cheap and you don't pay a penny until you actually draw on it. If you buy a property where you can force a bit of equity and/or in a market with good appreciation, you can season the property and six months to a year later, you do a cash out refi on the investment and you should be able to get close to pulling all of your investment back out and paying off your heloc. If you can't fully pay off the heloc, just attack the balance with your cash flow and pay it off as soon as you can. Rinse and repeat!
@Corby Goade - Does a heloc have closing costs? My understanding is it also isn't always a fixed rate of return. And isn't the term much shorter than 30 years? Re: the cash out refi, it's would be at 3.5% interest or lower, fixed for 30 years. Couldn't I just put this in a low risk asset until I deploy the funds?
@John Warren - I am definitely confused. There's no cash flow in deal 1 - it's my primary residence. I'm simply trying to take the equity out of that and use it to buy a rental property. But I don't understand how to put only 20% on a rental if you're taking the money out of a primary residence cash out refi. Meaning, if I want to buy a $100k rental, wouldn't I have to either put 20k down on a rental and get a new loan for the remaining 80k? OR, I could take $100k equity out of my primary residence, and essentially buy the rental for cash. But then I'm not taking advantage of leverage. Where I'm getting confused is that I'd still be paying - say, 3.5% - interest on the $100k that I cash out, so isn't that leverage? I'm just confused about how you only put 20% down on a new property when taking cash out of an existing property.
@Corey M.- HELOCS are usually interest only. Typically the only closing costs are paying for an appraisal, some banks dont even charge that. The bank I use has a zero cost HELOC. I look at HELOCS as flexible, short term financing. If I'm not 90% sure I can pay it off in a year, I don't use it. That said, I think it's a less expensive and more flexible option than a cash out nearly every time. What if you take out $150k in cash on a cash out refi and don't find an investment for four months? You'd have made approx $4500 in payments for nothing. If you did the same with a HELOC, you'd be out zero.
@Corey M.- HELOCS are usually interest only. Typically the only closing costs are paying for an appraisal, some banks dont even charge that. The bank I use has a zero cost HELOC. I look at HELOCS as flexible, short term financing. If I'm not 90% sure I can pay it off in a year, I don't use it. That said, I think it's a less expensive and more flexible option than a cash out nearly every time. What if you take out $150k in cash on a cash out refi and don't find an investment for four months? You'd have made approx $4500 in payments for nothing. If you did the same with a HELOC, you'd be out zero.
@Corby Goade - So what happens when you buy a property in six months for $100k, which you received from the HELOC? Then you still need to pay off the HELOC, but where does the $100k for the property come from? Wouldn't you still need a loan or cash out refi?
@Corey M.- yes, you would. Ideally for a BRRRR, you are buying a property that you can create some equity in over that six months to a year. If you can create 20% equity, which in an appreciating market, shouldn't be terribly difficult, then you get a cash out refi for the full amount of the purchase and rehab. Every once in a while, my numbers are off a bit and I might leave a few thousand in a property (on the HELOC), I just pay it off as soon as I can and get to work on the next deal.
The benefits you get with the HELOC are no payments until you close on the property and you get to make cash offers, which can get you huge leverage.
@Corey M. you are correct. If this is your primary residence, then yes you would pay more interest on the amount you pull out. If you raise your mortgage balance, then you will pay a higher amount. The difference though, is that you can take that capital out and get a return on it whereas it is currently "dead equity".
When you buy property two, you can definitely put down 20-25% and get a mortgage on that property. Once you extract the equity from property 1, it is not considered to be in any way related to your primary residence (property 1) when you buy property 2. It is crazy as it may seem like you are getting 100% leverage (you sort of are), but in the bank's mind you are putting a down payment into the property so you can get a loan.
@Corey M.- yes, you would. Ideally for a BRRRR, you are buying a property that you can create some equity in over that six months to a year. If you can create 20% equity, which in an appreciating market, shouldn't be terribly difficult, then you get a cash out refi for the full amount of the purchase and rehab. Every once in a while, my numbers are off a bit and I might leave a few thousand in a property (on the HELOC), I just pay it off as soon as I can and get to work on the next deal.
The benefits you get with the HELOC are no payments until you close on the property and you get to make cash offers, which can get you huge leverage.
@Corby Goade - I just checked the cash out refi rate with my loan officer, and it's 3.25%/30 yr fixed w approximately $2700 in total closing costs. My broker said that the risk with the heloc is 1) interest rate isn't fixed, and that can be costly 2) I could miss out on locking in an extremely low interest rate. I should not that my plan is to buy a turnkey property; I don't plan on doing any rehabbing on my own.
On a separate note, I plan on buying a place at or around $100k. I have $100k in cash in my bank, so is there any reason to take out a HELOC at all?
My other concern is that if I pay 100k cash for a property, and then decide to take cash out refi for $100k, I won't get the mortgage interest deduction since the money wasn't directly used to buy the property - it's just "replacing" what I paid in cash. Not sure if that's how a CPA would treat it, but it's a consideration.
And finally, at 3.25%, even if it took me 6 months to find a place, interest on a cash out refi of 100k would cost me $1625. I assume that a HELOC also has an interest rate at the same or higher. And I'd also be risking that the 3.25% rate increases, which would offset the savings even if a bridge HELOC had a lower interest rate.
Curious on your thoughts.
@Corey M. you are correct. If this is your primary residence, then yes you would pay more interest on the amount you pull out. If you raise your mortgage balance, then you will pay a higher amount. The difference though, is that you can take that capital out and get a return on it whereas it is currently "dead equity".
When you buy property two, you can definitely put down 20-25% and get a mortgage on that property. Once you extract the equity from property 1, it is not considered to be in any way related to your primary residence (property 1) when you buy property 2. It is crazy as it may seem like you are getting 100% leverage (you sort of are), but in the bank's mind you are putting a down payment into the property so you can get a loan.
So if I'm understanding you correctly, if I pull $100k out by doing a cash out refi, but the refi requires a 25% ltv, then when I move the money over to purchase a property for $100k, it's essentially like I put down a 25% down payment?
If I purchase a $100k property for cash, but then take the cash out refi later for the same $100k, can I write off the mortgage interest on the cash out refi. My understanding is that the mortgage interest can only be written off if it's used directly to purchase a rental property. But what happens if I'm simply replacing the $100k cash I put in with the $100k from the cash out refi? Can I still deduct the mortgage interest?
And finally, what are your thoughts on starting with a HELOC since I don't have a property yet and then moving to a cash out refi? At the current 3.25% interest, it seems like I'd be taking a big risk that interest rates will go up by the time I find a property. Is there any advantage of using a HELOC at this time, especially since I have enough cash to buy an $100k property outright?
@Corey M. Good points- I wasn't aware that you had enough cash to roll in to your transaction- that's a better plan. You are right on all points with the HELOC vs Cash out refi, and with rates as low as they are right now, there's a real risk of ending up with a significantly higher interest rate in a few months, should you refi out of a HELOC. If you have the cash, that's the best plan. The only downside to that is that if you buy with cash, you have more leverage to make aggressive offers, but you'd have to wait the seasoning period to do your cash out refi. If you buy now using a conventional loan, you get to lock in the low rate, but can't make a cash offer. The challenges never end!
Finally- you should talk with your accountant on the HELOC interest. My accountant confirms for me that any HELOC interest accrued when used towards a business expense is deductible.
Sounds like you have some great options- go pick up a great investment!
@Corey M. Good points- I wasn't aware that you had enough cash to roll in to your transaction- that's a better plan. You are right on all points with the HELOC vs Cash out refi, and with rates as low as they are right now, there's a real risk of ending up with a significantly higher interest rate in a few months, should you refi out of a HELOC. If you have the cash, that's the best plan. The only downside to that is that if you buy with cash, you have more leverage to make aggressive offers, but you'd have to wait the seasoning period to do your cash out refi. If you buy now using a conventional loan, you get to lock in the low rate, but can't make a cash offer. The challenges never end!
Finally- you should talk with your accountant on the HELOC interest. My accountant confirms for me that any HELOC interest accrued when used towards a business expense is deductible.
Sounds like you have some great options- go pick up a great investment!
Thanks for the feedback. I'm not familiar with the term "seasoning." What does my personal cash being used to purchase a proeperty have to do with a cash out refi?
@Corey M. with a few exceptions, you cannot do a conventional cash out refi on a cash purchase without waiting six months, or "seasoning" your acquisition.
@Corey M. with a few exceptions, you cannot do a conventional cash out refi on a cash purchase without waiting six months, or "seasoning" your acquisition.
I'm confused. I'd do the cash out refi on my primary residence now. But while I'm waiting for it to close, if I find a property, I'd just use my current cash to pay with it. Then once the deal closes, I'd use the $100k from the refi to replace my cash so that I can get the mortgage interest deduction.
i would do a cash out refi. Then buy several properties with that cash. Just put 20% down and grab as many as you can with traditional loans. Leverage that equity and let it work for you.
i would do a cash out refi. Then buy several properties with that cash. Just put 20% down and grab as many as you can with traditional loans. Leverage that equity and let it work for you.
Isn't that pretty dangerous for a newbie? I am taking $200k out of my cash out refi. I doubt I'm going to be able to get 10 separate loans for properties by putting down 20% for each. That would require a lender to assume I could pay $1mm back. I've never shown any income from rentals. All I have is my job and current salary.
i would do a cash out refi. Then buy several properties with that cash. Just put 20% down and grab as many as you can with traditional loans. Leverage that equity and let it work for you.
Isn't that pretty dangerous for a newbie? I am taking $200k out of my cash out refi. I doubt I'm going to be able to get 10 separate loans for properties by putting down 20% for each. That would require a lender to assume I could pay $1mm back. I've never shown any income from rentals. All I have is my job and current salary.
Another good option is for you to pull out 200k and use it for a BRRRR. I did my first BRRRR last year by doing this. I pulled out 146k from a cash out refi and then paid 135k cash for a house that needed a rehab. Then threw a tenant in there for $1700/month and it then appraised at 215k a couple months later. Then did a cash out on that house and bought another one for cash. As long as you're cash flowing, it's safe to do and you'll be able to find a bank that will lend you for future cash outs. I've done 3 cash outs in the last 8 months to snag more properties at a discount. When you buy properties for cash, you get great deals! Good luck!!
i would do a cash out refi. Then buy several properties with that cash. Just put 20% down and grab as many as you can with traditional loans. Leverage that equity and let it work for you.
Isn't that pretty dangerous for a newbie? I am taking $200k out of my cash out refi. I doubt I'm going to be able to get 10 separate loans for properties by putting down 20% for each. That would require a lender to assume I could pay $1mm back. I've never shown any income from rentals. All I have is my job and current salary.
Another good option is for you to pull out 200k and use it for a BRRRR. I did my first BRRRR last year by doing this. I pulled out 146k from a cash out refi and then paid 135k cash for a house that needed a rehab. Then threw a tenant in there for $1700/month and it then appraised at 215k a couple months later. Then did a cash out on that house and bought another one for cash. As long as you're cash flowing, it's safe to do and you'll be able to find a bank that will lend you for future cash outs. I've done 3 cash outs in the last 8 months to snag more properties at a discount. When you buy properties for cash, you get great deals! Good luck!!
I don't think I can do a BRRRR. I live in LA, where there are no cash positive properties, and anything you'd want to buy would be at least $500k. Hard to do a BRRRR when you don't live in the same city as an affordable rehab property. I also work a very busy f/t job, so I wouldn't be able to escape to deal with all the issues that come up with construction.
I have a question piggy backing off this thread ...
Let's say you do a cash out refi and leverage that capital out at 1/5 as per usual. Now you are paying interest on your new loan and the additional interest on the refi amount.
My question is:
Is it smart to tack on that additional refi payments into our analysis of our new property, or should we treat it as separate for our calculations.
I figure a good looking deal at first could be easily losing money after factoring the added refi payments