Question on equity

[Devin Slone]

I am looking to purchase my first property for a house hack. It's a duplex and will cashflow around $200 once both units are rented. I hear Brandon and them talk about after the year of living there to refinance out of the FHA into a conventional mortgage and then repeat the process. Do I need to take money out of the first property to put down on a new property? If so what if there's hardly any equity in the property after only a year?

[Randall Alan]

Quote from @Devin Slone:

I am looking to purchase my first property for a house hack. It's a duplex and will cashflow around $200 once both units are rented. I hear Brandon and them talk about after the year of living there to refinance out of the FHA into a conventional mortgage and then repeat the process. Do I need to take money out of the first property to put down on a new property? If so what if there's hardly any equity in the property after only a year?

 @Devin Slone

The availability of taking money out of your first purchase depends on if you bought your property well under market or have forced some appreciation, or if you put a lot of money down on the property initially, or if the property has seen significant market appreciation.  

If you are talking about doing a cash out refi, you typically have to leave 25% of the appraised value in the property.  Another way to say this is that the lender will loan to 75% value.  So if you own a $200,000 home that you still owe $150,000 on, there is $0 available to cash out.  If you only owe $100,000 on the $200,000 home, there is $50,000 you could do a cash out on if the lender loans to 75%. 

I would be more concerned about only cash flowing $100/unit.  This does not look like a great income producing property.  Of course I don’t know what all your figures look like - such as if you are factoring in lots of things like vacancy, capex repairs, maintenance, property management, etc - beyond the basics of principle, interest, taxes, and insurance?  But $100 in net profit/unit is a pretty skinny margin in my book. 

You will definitely want to wait for rates to come down before you refi anything with this property.  A refi typically costs $3000-$5,000 at a minimum.  If you are only netting $200/month on your property, it will take 15 months at a minimum to recoup the cost of the refi.  It wouldn’t make sense to refi into an 8% loan.  You want to wait for rates to drop back down to the 4-5% range in my opinion.

Brandon’s  advice you read may have worked in 2021, but is likely far less valid in 2023.  The entire real estate market is completely changed in the past 24 months! 

All the best!

Randy