To Cash out Refi or not?

[Matt F.]

Hello all,

I am currently trying to figure out if I should cash out refi and buy another house in cash, or save up and acquire another house with a mortgage. My strategy is to buy houses that need work (so its below market value) and then rent them once repaired. My goal is to have enough cash flowing properties to where I can build cash as fast as possible, buy more houses, and at a certain point begin paying them off/retire.

Basically the only advantage I see in doing a cash out refi is that I will have the money to buy a property in cash. My issue is that if I cash out refi, my cash flow will go down slightly (because the houses have appreciated in value since i bought them), and this is going against my goal of building cash flow. The advantage is that I can buy another house with cash (and own it - supplementing cash flow drastically). I have done the math, If i acquire another property with a conventional 20% down mortgage, then I will cash flow the same as if I did a cash out refi and bought one house in full cash and rented it. 

This is where I am stuck, which is the better strategy? Cash out refi or go conventional and end with the same cash flow?

[Chris Mason]

Originally posted by @Matt F.:

Hello all,

Basically the only advantage I see in doing a cash out refi is that I will have the money to buy a property in cash. My issue is that if I cash out refi, my cash flow will go down slightly (because the houses have appreciated in value since i bought them), and this is going against my goal of building cash flow. The advantage is that I can buy another house with cash (and own it - supplementing cash flow drastically). I have done the math, If i acquire another property with a conventional 20% down mortgage, then I will cash flow the same as if I did a cash out refi and bought one house in full cash and rented it. 

 It appears you've already done the math I was going to suggest -- calculating cumulative cashflow. 

Here is something you didn't seem to consider: the discount that an all-cash buyer can expect to get. I don't know what that will be in your market and that's a great question for a local real estate agent with boots on the ground in your area, but toss that into your math as well.

I expect that you will find, overall, that it puts you in a better cash flow position. 

Also, as others can/will attest, it's a pain in the butt to get a traditional mortgage on a run down and beat up home. Buying all cash and cash out refinancing them based on ARV when ready to make your next move is going to overall be fewer mortgage transactions (eg, fewer closing costs) relative to BRRRRRRrrrrrr, discounted homes, and included among them homes that no one could get a mortgage on anyways (these will be your MOST discounted).

Those incomplete homes purchased all cash will be huge money makers for you. Here's the thing: gutting and replacing a kitchen is going to cost you way less compared to buying a home with a pre-gutted kitchen (squatters, thieves, etc) and putting a new one in. Two reasons: 1) Less demo cost 2) Greater all-cash discount on the purchase price. 

And also guys like me will have fewer "uhhh yeah so Fannie Mae won't lend on it if it doesn't have a roof... duct tape and a tarp doesn't count" phone calls. Needs to be a functional and complete home to use Fannie's cheap money to buy it.

For people NOT in your position of being able to buy all cash, I often suggest granny homes. Grandma has lived there for 50 years smoking inside, not upgraded anything, there's cat urine smell, and now grandma has moved on, but she left behind a basically functional and complete home that Fannie will lend on. In your position, you can/should go for the homes that were typical granny homes 5 years ago, and then were blights for 5 years and criminals stripped the appliances, etc.