Should I refinance w/ cash-out or use my taxable account?

Question

Should I refinance w/ cash-out or use my taxable account to buy homes?

Hello everyone!

I am thinking of investing in real estate. Maybe in 5-10 years have enough rentals where I can quit my job and do real estate investment full time.

Situation:

- My home is worth 688k

- I still owe 227k on the mortgage

- I have 470k in my taxable account (mostly index funds) - they are doing good this year

Options

1.Sell funds in my taxable account to use as down payments for future investment homes. I will have to pay long-term capital gains tax

2. Refinance my home with cash-out with 30 yrs fixed at 2.6% interest rate. I can borrow up to 510k to use for down payments.

If I borrow 510k, the mortgage will increase from 900/month to 2000/month but I can handle that.

I am ready to buy 3-5 houses in the next 12 months. Maybe do BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

What would you guys do?

Chad Duncan · Answer

If you want to ultimately live off of rental income, why would you increase your home costs? That makes your goal less attainable as you now have to cover more costs. Your taxable account is only going to be taxed on the gains, so find out from a tax advisor what the taxes will be before making the decision. Margin trading is an absolute terrible idea as it is complex, riddled with fees, and incredibly risky. I think you should figure out the cash flow you will need to accomplish your goal, then see which decision makes the most sense with that in mind.

Justin Phillips · Answer

Exactly, so you don't have opportunity cost of trapped equity, or the holding costs of cash-out.

Basit Siddiqi · Answer

@Dan MarlNo one can properly give you feedback until you tell the audience what type of real estate you plan to invest in and at what price point.If your stock investments did as well as you say they did, you may have to consider tax consequences upon a sale.

Dan Marl · Answer

Hello Dan,

I didn't know you can take a margin loan off of my taxable account. You are right that it seems risky even though the interest rate is low. I am a long-term investor in the stock market I don't care for fluctuations. It scares me to know that if there is a stock market correction the brokerage can liquidate my account if it falls below a certain threshold.

Dan Schwartz · Answer

@Dan Marl you’re gonna have to pay off the $227K mortgage when you get the new $510K mortgage.

You’re borrowing $510K, but you’ll “only” receive $283K less costs at closing.

Please be sure you understand all of this.

There are also ways to use your stock portfolio as a line of credit without selling and triggering a tax event.

Jacob Curtis · Answer

@Dan Marl sounds like option one comes with some significant penalties when option two does not. If you use BRRRR with option 2, depending on the gap between the purchase price and ARV, you can always recoup the equity cashed out and pay off the increase principal with enough to keep investing. I'd just keep investing the entire amount to help scale faster, the increase in payment will be covered by cash flow fairly quickly. There is also the HELOC option as a third, which differs slightly from the cash out, just need to identify what is the better option for you.

Dan Marl · Answer

That's a really awesome idea. Only use the HELOC when there are opportunities!

Dan Marl · Answer

Thank you Justin for the informative reply. I have never heard of a position (lien?) HELOC before. However, wouldn't the rate of the HELOC change depending on the Fed rate?

Thanks

Justin Phillips · Answer

With this loan, it's less about the interest rate and more about interest cost. When all your regular deposits and idle funds are sitting on your balance, your payoff timeline is greatly condensed. Even at that average interest rate over the last 25 years, the interest only cost will be cheaper than a fully loaded PI payment. My wife and I are currently putting those idle funds to work, increasing our cashflow, and when the market turns we'll simply write a check and buy the next property from our line. For those who qualify, it's a great financial tool to have in your toolbelt!

Dan Marl · Answer

@Basit Siddiqi

I am thinking of single family homes in the prices of 275k to 350k.

My stock portfolios are mostly index funds and the last 12 months the gains are around 15%

Should I refinance w/ cash-out or use my taxable account?