Cash flow after cash out refi?

[Devin Cohan]

Hey BPers,

I have heard or read countless investors say on podcasts and forum posts that they cash out, refinanced to pull out the equity to purchase another deal. My question is once someone does the refi are they typically expecting to still cash flow on the property refinanced or is it typically a non cash flow mortgage pay down equity strategy. The reason I ask is that I have a property that is a good candidate for a cash out refi strategy but would barely make the 1% rule after the refi and have heard that's on the edge of cash flowing pennies, breaking even, or cash flowing negatively. Do most of the investors I hear on the BP continue to cash flow after the refi or what? Appreciative of your time in answering this post.

Thanks, Devin

[JD Martin]

Definitely still cash flow after doing a refinance, otherwise there would be little point in going forward. The goal is to have a multiplier effect by having multiple properties cash flow.

Example: I have a free & clear unit that cash flows $550 after taxes/insurance/maintenance. I pull $40k from that unit, plus some cash on hand, buy another unit free & clear that cash flows $550 after taxes/insurance/maintenance. The first unit now only cash flows $400 because there is $150 worth of note service on that unit, but combined the two units cash flow $950. 

You can play with the numbers at any level you want. If a unit barely cash flows at $200 or less, it is probably not a good candidate to cash out unless it's in a rapidly appreciating area OR you have a lot of equity in the unit and can purchase one or more higher cash-flowing units elsewhere, i.e. it can make sense to have that unit zero out if the cash withdrawal results in a significant cash flow increase elsewhere.

All of this has to be balanced against your total portfolio risk. If everything you have is leveraged to the hilt and you have little in the way of liquidity, you are walking a fine line between prosperity and disaster. If you have a couple of units clear, or major levels of liquidity to cover loss of income (I'm talking more than 1 year of income loss), you can probably still make it work.