Cash-out refinance or hold for cash flow?

Question

Hey y'all! My name is Tyler Pfaffenbach. I'm a new member here on BiggerPockets and this is also my first post. I'm very interested in Real Estate Investing and have read a couple books on the subject (one of them being 'The Book on Rental Property Investing' from BiggerPockets' Brandon Turner) but I have yet to officially start investing in anything...sort of.

I currently own a Townhome that I bought 5 years ago that's worth much more than I paid for it. Full transparency, I owe $90k and it's worth roughly $150k. Since I acquired the home I've put a lot of work into it; built a covered patio, rebuilt the fencing, remodeled bathrooms, general up-keep, etc. It's an older home, built in the mid 80s and needs some more work (but not much) to get it to the full potential value, which I plan on doing.

So with that said, you can see I have a couple options to further my investment(s), and that's where I thought my community could give me some advice. I honestly don't know what to do from here. I've thought about approaching a cash-out refinance and using the cash to invest in other properties, but that would cut into my cash-flow on THIS property being that my mortgage payment would increase. I could HELOC on the house but would be adding more debt that way as well. I could buy a new property with an FHA loan and rent this property out as-is and slowly save the rent checks while BRRRR-ing the new property I'd live in. Or I guess I could stay, save and invest later, ultimately delaying my wealth.

So without dragging this dissertation on any further, if you were in my position, what would you do?

-Tyler

Thomas S. · Answer

You are facing the typical problems of a new investor. If you look at it from a strictly business perspective then dead equity is a bad thing to have. You are buying  your cash flow.... the property is not producing cash flow. This creates a extremely low ROI and hampers your growth.

At this point in your life what you want to do is grow your real estate holdings quickly and then once you reach your goal you sit back and let your tenants pay down your debt. With some luck by the time you retire you then liquidate everything and retire on your invested income to the south seas.

I personally love leverage and pull as much equity from a cash flow property as possible and invest it else where to maximise my ROI. Initially it was in more properties but ultimately in other vehicles...income funds. I do not like having dead equity in real estate as it is at too much risk to the fickle real estate markets. Also, as I stated, the ROI as dead equity is so low it is not worth even bothering to have paid off real esate holdings. It is OK to work toward paying it off with the intent of selling but having dead equity long term simply is not logical except those buying under 50K properties that can not finance.  Even they should at some point liquidate and move up to leverage.

In your situation you have enough dead equity to probably purchase two more properties. You need to access it some how and put it toward earning it's keep.

Tyler Pfaffenbach · Answer

@Josue Vargas All great points, thank you! I appreciate the direction because I am a bit nervous to start this journey. I am one of those people who does my homework and then overthinks to the point that I never actually take the leap. I don't want to be that guy. I'm 32 with no kids in a good situation and I really want to look back when I'm older and be happy I took the risk(s).

Josue Vargas · Answer

Really good question.

1. Refi sometimes makes sense, cut on PMIs and better cash flow.

2. Use the appreciation on your property to get cash and reinvest, if is on your REI property not personal.

3. Do not spend $ on something it will get $0 income... You stated flip your won homestead.  Will it give you appreciation and cash flow to keep going or is a drawback if you rent, what costs compared to purchasing or renting a place you like and for you to live?

Sometimes investors like us are so focus on the end outcome that sometimes we forget to live the life we want to...

Tyler Pfaffenbach · Answer

Thank you for the advice! I like the HELOC idea if the rates were to be low.

Mike McCarthy · Answer

I like @Kat Rathell approach.

Refinancing to a larger conventional mortgage doesn’t sound like it’ll make sense. 80% LTV would get you a $120K mortgage, only $30K more than you have now, and you’d probably see $5-7K of that disappear into closing costs. Plus probably at a higher interest rate too.

When you get into loans and refi, it’s just a numbers game to see when you’d break even - and whether you can do enough with that $23K to make it worthwhile.

Kat Rathell · Answer

There are some great 1st year HELOC rates available by local credit unions, depending on LTV they can go as low as 1.99%-2.99% in the first year. I heard about - but have not seen in person - an introductory rate of 0.99%. Gotta look out for rates past the 1st year, but it’s a great place to start capitalizing on the equity in your home to kick off your real estate career.

Plus, on the HELOCs there’s a time period when you need to pay only the interest, which I do not advocate for for an extended time period, but in the beginning that can reduce the stress while you are acquiring/rehabbing, renting out and refinancing.