Cash out refi for rental property purchase?

Question

Hi,

I purchased my residence 7 years ago for $320k at 3.625%/30 yr mortgage. I have 220k left on the loan and the house is now worth $560k. I am thinking about taking a cash out refi to buy other properties, but I love in LA where just keeping my money in my house would probably net me 10%/yr equity growth.

Is there any value in doing a cash out refi, which would net me about $260k in cash? I also have about $120k cash to work with and a 760+ credit score.  My industry is very volatile, and so I could feasibly be out of a job for 6 or more months every two years or so.

I am considering rental properties, but in any relatively nice area in LA, a 800 SW ft apt will be at least $450k, which means I couldn't afford to buy it for cash.

I'm wondering what I should do with my money. I can keep my free cash in the stock market. Leave the equity in my home and not refi. Or I can pull some or all the equity out of my house and buy another property to create extra income. Mind you, there will be no cash positive properties in LA, but equity growth is great here.

Thoughts?

Corey M. · Answer

But is it worth it to do a cash out refi, pay closing costs, etc to buy a rental in another state? And will that rental net a significant benefit over just a long term stock market investment, which averages about 8%/yr?

Account Closed · Answer

@Corey Marsh Depends on the deal, you can always negotiate or create the right deal. Also depends on your wholesaler. We are seeing about a 40% cash-on-cash return from our real estate investments in our markets with very minimal risk.

Account Closed · Answer

@Corey Marsh You could do a few things, one of them being not reinvesting in California. There are plenty of tertiary markets out there that could yield you the best possible cash-flows and safety, unlike primary markets. You could get a tri-plex for $190K that rents at $3K monthly. You just need to know where to look.

Stephen J Davis · Answer

If you know what you are doing, it is a great idea. Equity in your home is dead and non-performing. Make sure you take a course on investing in real estate before you risk that equity. Good luck.