Pros and cons of cashout refi

[Jason Neff]

Hey all,

Pretty new to this forum and RE investing. I'm currently weighing the pros and cons of a cashout refi on my single family rental. 

I bought this rental as a primary residence in '17 for 190k with a conventional mortgage around 3.75% interest. Mortgage, PMI, taxes, etc. amount to $1300 per month. Surprisingly, I was able to rent this out for $2000 with help from a rental mgmt company. After accounting for mgmt, vacancy, expenses, etc. this seems like a profitable rental. The calculated home value is also now close to 300k after minor improvements, though this price is supported by relatively few comps nearby. In a nutshell, this rental is awkward size for the area, and most similarly sized homes are in a nicer county, suburb, zip code, and school district a mile away.

My current dilemma is that I have credit card debt approaching 40k, of which I'm paying about 22% interest on half and 0% on the other half until Fall. I also have useless misc loan debt around 30k at an interest rate of 5%. This debt is partly the result of a couple moonshot investments, which could still pay off. But it's mostly due to renting in an overly expensive area for too long. Fortunately, my income allows me to easily make the monthly debt payments, though I'm unable to save much for future deals -- that is unless I completely ditch saving for retirement, or go into full on PB&J austerity mode.

So I recently started looking into cashout refi's. It seems possible to extract 40k @ a new 220k mortgage to pay off the credit cards. The downside is my refi interest rate would be closer to 5.9% Apparently, this rate was slightly higher due to my 695 credit score, but close to the "going rate" for a rental refi. Even with cancelled PMI, my monthly mortgage/tax payment goes up to $1650, eating most of my cash flow.

The rental would likely break even for the near future and preserve equity, barring a recession. But it becomes less attractive as a long term rental, and that interest will add up over time. The benefit is that I'd have the immediate ability to save more for a future deal, and largely reduce my useless debt. I'm currently paying $1200 on my non mort debt, which seems too high.

Another option is make every effort to sell the rental around 300k. Debt aside, there are a few red flags with the rental like its close proximity to high crime apartments and a recent garage break in. On the other hand, there's new construction going for 400k down the street and a pending sale comp across the block for 340k. The rental also has < mile proximity to nicer homes that approach 1million.

The cons against selling- It's quite possible I get far less than 300k whenever I do sell. I'd owe capital gains unless I due some kind of like exchange (?). Timing is less than ideal as my tenants have a lease through June. Selling the home rented also seems like a questionable deal to investors who are paying over 60% more than I did. I'm also giving up a potentially very good rental property, though better deals surely exist. 

I'm curious if anyone can share other options or add perspective on how to think about this. Obviously, my long term goals matter. I think my ideal next property whether I keep this is a multi family house hack FHA in a less transitional area. Over the next 10 years, I'd like to replicate my job income with as few high quality rentals as possible. In my area, triplexes and quadplex are rare though there are numerous duplexes.

Thanks!

[Adam Gollatz]

Since you have a lease through June and its a single family home, chances are it wouldnt sell for what you want, so cross that off. 

Look into the cost and terms of getting a HELOC. You should be able to get approved for up to 80% LTV on a rental at a lower interest rate than the 22% on your credit cards and you get to keep your original loan at your original rate, so the cashflow doesnt change. then its just shifting debt. keep the 0% for as long as you can, pay off the 22%, then shift the 0% to the heloc just before the promotional period runs out.