Cash-Out Refinance Breaks the 1% Rule?

[Rhyse J.]

Hi everyone,

I'm assessing my options to scale my portfolio from my current two doors.  Right now, my properties are conforming pretty well to the 2% rule, but I'm weighing the option of refinancing the properties to leverage the decent amount of equity I have in them.  However, refinancing these would bring my rent-to-debt ratio to just under 1% if I were to take out the full 80% of the property value in a refi loan.

How have others in this situation weighed this choice?  What other factors need to be considered?  Does the answer to this depend at all on the markets in which I'm investing (I'm looking in the Chicago area)?  What would others recommend?

Thank you for sharing your perspectives!

[John Warren]

@Rhyse J. this is always the dilemma when you do a cash out refinance as the monthly income from your first building will drop as the debt load rises. I think it is useful to think in terms of how many years of cash flow you are getting access to through a cash out. For instance, can you get the equivalent of 10 years of cash flow with a cash out refinance? If so, you should grab that capital and redeploy it as the time value of money shows through. 

Now this is only true if your current building will truly support the debt. Make sure you are budgeting for CapEx issues. Make sure you are thinking through whether you can continue to self manage as you grow (if you are). A lot of investors get stuck in land lord hell where they have 25-75 doors... you have a lot of cash but not enough to support full time help!