15 yr vs 30 yr for a cash out refi

[Talley Haines]

We purchased a house in the fall and paid cash for the house with plans to do a cash out refinance.  With a 30 year we would cash flow around 150 a month after taxes insurance prop management and money left for repairs and vacancy.  A 15 year would make it so we are at about a break even point but we would pay it off around the time we will hit the retirement age.  I havent had much luck finding anyone to do a cash out on a 30 right now but I found a local credit union that could do a 15 year.  Anyone have any advice on this situation.  

[David Ginn]

@Talley Haines


Hi Talley,

I'm going to give you an answer that will be tough to hear and competently against what everyone has been telling you.

Renting homes is one of the highest risk investments you can get into and doing a cash-out refinance is even higher risk.

Let me explain. In Las Vegas, in 2006 a home could be purchased for $150,000.00. You could rent it for $1300.00 and after taxes and insurance, you would cash flow at over $150.00 per month. Then came the great recession. Prices on that home fell back to $50k. That home could be rented for $600 a month.

So let's look at the dynamics of a falling market. If I came to you and said, “I have a business that's worth $150,000.00. It will make you $150 a month. In two years the markets will fall and it will be worth $50,000.00.” Would you buy my business? You would say to me, “No! Do you think I’m crazy?”

You see in real estate for some reason we seem to think that we can deny all business fundamentals and that somehow, our situation is different. I have heard everything from, “You don't take a loss until you sell." to "It will rent during a down cycle." Most people who hear me say this still believe in defying the odds. They think of all types of arguments to try to prove my business sense is wrong.

Here is an actual example shared with me that happened at the start of the Covid-19 crisis. As you read this, keep in mind that this happened in one of the market segments that people would have said is the most recession-proof.

There was an investor in Texas that owned a 30 unit complex. COVID-19 hit and they stopped all foreclosures and evictions. All the tenants got together and decided to not pay rent. Now, whoever owned that building and had the loan on it just got trashed by his tenants. He and his family's financial lives have been turned upside down. He cannot even get to a judge until June, and then the courts will be so backed up, it could take months to get his tenants evicted.

Also, my local news reported that 1 in 5 market-rate apartments are missing rents right now, and nationally it's 1 in 3. The real issue is clear. You can buy and rent when a market is headed up a bit, just like a business or a stock that you sell before a market starts to fall.

Buy and hold investing is a term that does not make good business sense. There are much better strategies to do in real estate when a market could potentially fall or is falling.