Is this a bad time for a Cash out Refi?

Question

Hi BP Community!

I am looking for any advice someone may have for my current situation, thanks for any help!

I own a SFH rental in Peabody, MA which has appreciated quite a bit this past year. Right now the LTV is approximately at 65%, and it cash flows a little more than $700/mn (I manage it myself).

Question: Is it to risky right now to do a cash-out refinance for approximately $40k-$50k and bring the LTV to 75% in this current market? I would like to cash out now, before rates start increasing again to have money ready to buy more real estate, especially if the market dips. I have been reading a lot on the current economic situation, the housing market, and keeping up with the forums on peoples opinions of whether or not the housing market will crash, or possibly a small dip in the market as the rates start to increase. I am learning a lot from reading the forums but it hasn't necessarily helped me make up my decision, and if anything, has made me more uncertain. My concern is that if I do the cash out refi, it will likely put my mortgage around $1900/mn, and the property rents for $2750/mn which still doesnt seem bad. However, if the market/economy were to crash 20%(including rents) it would likely rent for $2200/mn and I would essentially be breaking even, or loosing money if a big cost expense were to happen. And if there was a crash and for some reason was forced to sell, I would likely only break even. I know a HELOC is an option, but that doesn't seem feasible right now with interest rates on the cusp of rising.

So, the main question, is a 75% LTV in this "over priced" market to risky?

Thanks!

-Pat

Heath Thomas Jr · Answer

@Patrick Chafe  I think it absolutely makes sense to take advantage of the low rates and take some cash out.

While it is the right thing to consider the downside, rent decreases of 20% are highly unlikely. The fact that it happened during Covid was a very unique situation, but you have probably noticed that rates are already recovering if not accelerating. It is a better idea to consider what rental rates do during recessions, which usually never drops that considerably. Housing prices are a different story, but if you have a 30 year loan and intend to hold the rental for the long term, you also shouldn’t worry about that.

Now, even if this worst case scenario did happen and you are breaking even on the property, would you have to sell immediately? I imagine you have a job and some savings that could cover any shortfall for a reasonable amount of time.

You touched on it some, but it is also important to consider the upside. Having $40k+ at your disposal right now to jump on new opportunities or even just investing in the stock market in the meantime offers the potential for a much higher rate of return.

If you are ultra conservative, take half as much money out so you have more buffer on your monthly payment. PM me if you want to discuss more!

Patrick Chafe · Answer

@Heath Thomas Jr Hi Heath, thanks for responding and providing some advice! I also think that a rent decrease of 20% is highly unlikely but was looking to see what other people thought. I do plan on holding the property for a very long time so not necessarily to worried about the value of the home but more the strength of the rent holding in an economic crash. Now, I tend to think(or hope) that we wont see a big crash, but more of a plateau for a while. If I did this cash out refi, I would replenish/add to the emergency fund just for a little extra comfort but would like to use the rest to buy more real estate. $40k wouldn't buy much around me so likely I would have to look out of state which I have never done before.  Have you ever invested out of state? Any advice on that avenue?

And what is your opinion on where the economy/housing market is headed?

Thanks!

Heath Thomas Jr · Answer

@Patrick Chafe $40k might not be a lot for an investment property, but it could be plenty to buy a primary house if you currently don’t have that!

I have not invested out of state yet, but I wouldn’t be opposed if I had a trusted team in place. I have considered deals out of state though and what I have found I am most comfortable with are areas within a 4-5 hour drive max so I can get to them relatively easily if I absolutely needed to.

I am not naive enough to say I know what the economy is going to do this year or next year, but I do know rates are historically low so finding a way to put money to work whether in real estate or not is prudent.