SFR Investor · Dallas, TX · Member since 2012 · 11 posts · 0 votes
I have a SFR with good returns and decent equity. Should I tap that equity to get capital to buy next SFR or go the longer route or saving additional capital while keeping that equity in place?
Richard, this depends on your risk tolerance and whether or not your property will still cash flow after the cash out.
Personally, I prefer to leave some equity in the property, to be tapped in case of personal hardship or if rents should decrease significantly in the future. So I take the longer route of saving for each new acquisition, but like I said your risk tolerance may be higher than mine.
Do the math, Richard. What's your cost of funds on the refi to pull out equity? I'm guessing it's pretty low, if you're in a traditional mortgage. If you can get into a decent SFR rental, you should be able to beat the refi cost with your cash flow. The one question I would have is why not a HELOC, instead of a refi? I'm a fan of the HELOC, since you don't start incurring costs, until you actually access funds from it. That give you time to shop and find a solid deal, rather than feeling the need to buy something, simply because you've pulled the equity and are not paying interest on it. Just a thought.
@Jason Crain, Thanks! The property will still cash flow after the cash out but I am wondering if it is worth the closing costs. I appreciate the caution with rents decreasing or personal hardship. Will continue to weigh the options.
Richard, I was in a similar position recently and made the call to do a cash out refi. I'm glad I did because I am about to close on another property this year which would not have been possible without the additional cash.
If, like me, you intend to hold the property for at least a few years, will still maintain > 20% equity after the refi and the property will still safely cash flow, then it makes sense (in my opinion) to get some cash out and put it to work for you in additional investments.
I'll admit my risk tolerance may be higher than others, but I am looking to grow my portfolio of properties as quickly as possible while interest rates are still low and deals are still plentiful.
As Hattie mentioned, a HELOC may be an option to tap into the additional equity and reduce/avoid closing costs. However, most banks will not offer HELOCs on investment properties. They traditionally stick to owner-occupied primary residences. Also, HELOCs usually have a variable rate which is pegged to the fed rate (which will rise in the coming years).
If you do refi, resist the urge to jump on the first deal you find. Make sure it's the RIGHT deal.
I've basically been doing what @Kevin Scanlon describes, as my and my husband's investments goals are similar to Kevin's, yet most of our Helocs have indeed been on our investment properties.
Yes, the variable rates can rise, and a fellow investor is planning to sell his 2 properties with Helocs next year if/when the rates go up.
Thank you all for the advice. It looks like I may be looking at this situation too narrowly and should also consider a HELOC as that may be a good way to access the equity without all the costs associated with a refinance. As is the property should still be cash flow positive after accessing the funds so my best bet is to spend the time looking for a deal while getting the finances ready.