How do you know if/when you should refi

[Amy Ranae]

Hey BP. 

My first rental is going great, all rented out and cash flowing like $650ish/mo. I've got about 65k equity in it. I've never done a cash out refi before, I think I grasp the basics, but is it worth it to just pull that cash out and sit on it until I find my next property because then my cashflow would go down to cover the higher loan amount, yes? I know there are circumstances where you can leverage the property without actually pulling the cash out of it but I am not crystal clear on how that works. 

I made an offer on a second rental townhouse possibility a few weeks ago but lost in multiples and I think it was because my goal is for a multi fam 4+ unit so this wasn't the right one. I am saving up for downpayment and researching buildings in my area that are non-entity owned and have no mortgages. I would like to get a building by fall so I want to have my downpayment figured out before then. 

So the Q. Do I refi and pull the cash out and take lower cashflow? Or figure out how to just leverage the equity? 

Thanks!

[Andrew Postell]

@Amy Ranae there are two main methods of leveraging your equity:

1. Cash Out Refinance

2. Line of Credit

There are pros and cons to both of course so I'll attempt to make some comparisons here.  

The cash out refinance with a conventional loan will be limited to 75% "Loan-to-Value" (LTV) on a Single Family Home and 70% on a multi-family unit. There will be closing costs again but the rate will be fixed over a 30 year period. You will need to take out the cash at the time of closing whether you need it or not.

The Line of Credit (LOC) option will have similar LTV limits but the difference here is that you can access the money whenever you need it. And as long as you pay the LOC back you can use it over and over again...well, for about 10 years. The rate will likely be variable but there are hardly any closing costs to be approved for one. But LOCs are designed for short term use. Meaning if the rate keeps adjusting through the years what will your cash flow be in 10 years?

The main philosophy behind LOCs is that flippers use them (since they can pay them back quickly and reuse for the next property) and a cash out loan is more or less designed for people who buy and hold.  Hope this helps!