Best way to Cash Out equity on conventionally mortgaged rentals??

Question

Hi All

Backstory. I have 2 rentals. Both were mine and my husband's primary homes prior to marriage. We kept them and rented them out. Both have about $100k notes on them. Comps are currently selling for $220-225k.  30 yr mortgages at 4.25 & 5% interest. They are in our names. Not an LLC.  That is a lot of equity sitting there that I don't know how to pull out without complications. Both cashflow at about $2-300 each.  If I cash out refi - I lose our conventional mortgages and low interest rates. If I try for a HELOC and the bank requires documentation they will know that they are no longer our primary residences.... I can't even convert them to an llc without having to pay both sides of our transfer tax here in PA.  I don't have a deal yet but I am actively looking for another rental or small multi-family and need cash to be ready to act.

Ideas???

Carlos Ptriawan · Answer

If I can simplify thing, my thought process would be something like this:

- If rate is low, then best way to tap equity from rental is definitely refi, HEL or HELOC product.
- if rate is high, then the best way to tap equity from rental is selling. This high rate market makes investment in risk-free CD to be higher than appreciation. Nationwide appreciatiation is now 3-4% at max while CD/HYS can give you 5.5%. Crazy time.

I've been doing that by selling property that has high LTV and re-invest into MM/CD/HYS/Bonds or general RE notes.

Here's why I never want to do DSCR. Lets say you have $100K equity, you give it to lender, they charge you 10% interest rate.
But, if you apply to PLOC, you may approve $100k too, with almost the same interest rate. Bizarrer right, why you want to give your asset to the bank for free LOL

DSCR is good when used wisely. You could also wait til 2025 when the rate would settle down. Q1 2025 would be fun to watch.

John Morgan · Answer

@Maryanne Kichline

Sounds like you’ll break even or have negative cash flow if you do cash out refis. However, I’m a huge fan of cash outs to scale up and get better cash flow. I’ve bought 14 properties for free basically from cash out refis on properties that had some equity just sitting there doing nothing for me. It’s all about your return on your equity in your two rentals. For example, I just did a cash out refi on a rental to pull out 168k to play with. I’m now only breaking even on that house with the new mortgage and high interest rate. However, the 3 rentals I bought with the $ are now cash flowing me $2900/month combined after all my expenses. So I was able to get a much better return on that equity that was wasted and just sitting there in my original rental. Play with some numbers for fun to see if you could get a better return on that equity than what you have now. I bet you could!

Carlos Ptriawan · Answer

I just read ridgelending group has new heloc offering for rental, they're known very friendly to rental folks.

Maryanne Kichline · Answer

@Chris Davidson thank you!

Chris Davidson · Answer

If you have "low" rates on a 1st position it can make sense to not do a refi and just get a second of some sort. It all comes down to amount of funding needed, and what the numbers say. However I have been using LOC's for awhile. The 5% may or may not make sense but would just have to dive into the numbers with what the lender can do. Another option would be a refi and pay off one property to turn around and have a larger LOC on a "free and clear property" This likely will have higher payments when fully utilized, but could provide for a very flexible path to acquiring more units.

Creating relationships with a bank is huge IMO when you get to a point where you looking to scale. As a good lending partner can do more for you long term then a discount online lender can in the short run.

Best of luck!

Maryanne Kichline · Answer

@Chris Davidson thanks! I’ve heard HELOCs are hard to come by these days. Is that true? I’ve got to find some local reputable lenders.

Randy Rodenhouse · Answer

If you refinance your cash flow pretty much go away to break even based on a quick calculation (of course I don't know all you loan terms so guestimate).  You'll probably end up with around $100,000 if you're able to refi both together and rate will be in the 7% range. Usually the lenders that will do this will want you to put properties into an LLC and then refinance it which could trigger the PA transfer tax. You would only be able to HELOC on one which would limit cash out and I am not sure you would be able to since you don't currently reside there.  The question you have to ask yourself is can I make more with the cash out than the difference in interest rates .  Probably yes.

Alfredo Rodriguez · Answer

You can find a lender that can still give you up to 70-75 percent of the market value and give you whatever equity you have back. Now your new monthly payment will be higher that what your currently mortgage is since interest rate may be potently doble of what you currently getting. So if you like to keep this properties and get some money back you have to find a way to make this homes cash flow a little stronger. You can do it through Airbnb, or any type of STR platform. Even a midterm rental furnished. This way when you cash out you can get 40-50 k maybe per unit and use this to invest in your next deal. Make sure your getting returns on your current houses that will pay out this new mortgage and cash flow some extra income. There are many ways you can continue investing based on your situation.

Kerry Baird · Answer

S&T Bank, Fulton Bank, Spring EQ, Figure

Chris Davidson · Answer

@Maryanne Kichline you can get a HELOC or equity loan which wouldn't effect your 1st position loan. This will allow you to keep you rates, and payments but access some capital without having to change the deed.

Since you don't have a deal yet  I would look at the HELOC that way you aren't burning a whole in your pocket with funds, and also aren't paying interest until you draw on it.

Best of luck!

Best way to Cash Out equity on conventionally mortgaged rentals??

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