New guy, looking to cashout refi to buy multi-family | Options

[Nicholas M.]

I'm looking to pull all the equity out of my first home purchase, which is now a rental, in hopes to buy a duplex or a quadplex.

My first mistake is renting to family but it is what it is. I'm collecting $1,800 a month presently on a $1,300 mortgage. I should be renting this property out for more, maybe $2,200-$2,500 a month but family. I understand this is a mistake.

The cash out refi numbers are as follows (3.99%)

(monthly mortgage payment, which includes [principal, interest, escrow] = cash to me

$2,200 (P+I+E) = $195k (This is the max, 80% LTV)

$2,000 (P+I+E) = $175k

$1,900 (P+I+E) = $133k

It was advised to me to go the $195k route and in hopes, make up for the $400 difference in rent/mortgage a month ($1800 + $400 = $2200) to enable me to go buy another property but also put $25k into a bank account to fund repairing the properties. This seems like an aggressive approach to me.

After reading on here over the last 24-hours, I get a sense that I'm moving much too fast (its OK to go slow and learn!). I've only rented my first property for 8 months. It's cash flowing already -- why change that? (is taxes a concern?) And the idea would be to buy out of state (Phoenix/Tempe, AZ) and hire a property management company. Either two duplexes or a single quadplex. This doesn't seem advisable from what I've read on here (out of state for your first property and no real management experience).

Another concern is paying tax on the rent profits. Paying taxes on the cash flow, when I'm just putting it into an account for repairs, is a concern. If I'm taking a loss on the rent/mortgage difference, am I able to write that off? Does it make sense to lose money on the rental property to avoid having to pay tax on the rents? That is where the idea of putting $25k from the refi into an account for repairs comes from.

I hope this makes sense... thanks for reading!

[Dave Foster]

@Nicholas M., Agree with @Jaysen Medhurst here.  If you refinance this property you'll be paying around $4K (the loan costs) for the privilege of losing money every month (mortgage payment of 2200 less rent of 2200 leaves nothing for all the other expenses that Jaysen listed).  And retail value of property is $400K?  That's not a good rental unless there's some appreciation play.

You mentioned it was now a rental but had been your home.  If you've lived in it for two out of the 5 years prior to selling it you can take up to $500K in profit tax free if married (250K if single).  If so I'd strongly recommend that course and then take the tax free cash and buy another property if you want.

If you don't qualify then this is what the 1031 exchange is for.  You can sell and purchase a better producing property.  The cash out refi still leaves you with a bad rental.