Cash out refi or no?

Question

Hello everyone

I currently had some of my rental properties appraised as I’m looking into cash out refi…

What thought process is usually taken into consideration  to determine whether cash out refi is a good idea or not? I may have another investment that I want to pursue so I can use this money towards that. If not, then it’s nice to have money and use it when the time permits. I will be losing roughly $300/month in cash flow doing this. Will these houses appraise for more in the future? Probably. Will interest rates increase? Maybe. Who knows. Any suggestions/insights are greatly appreciated.

Greg Kasmer · Answer

Nadir - I'm considering cashing out via refinance as well. You mentioned "losing" 300/month in cash flow, however, how much cash will that free up for you? And, what type of return do you anticipate garnering with that cash in another investment? For example, if you're pulling out $80,000 in cash you're paying about 4.5% for that cash (3,600 loss in cash flow / $80,000). Then, the question is whether you can generate much more than 4.5% using that cash? So, if you can buy another property and then generate 8-10% cash on cash return and benefit from appreciation in the future on the new property as well as depreciation, it would make sense to refinance. Obviously there are more items to consider when refinancing like interest rate, term of the new loan, long term strategy of existing property and new property, cost of refinance, etc... but the above is how I would think about refinancing at a high level. Good Luck!

Joe Villeneuve · Answer

This makes no sense.  Worse, it makes no dollars.  There is no "versus".  Negative CF is NOT a good thing.  Why would you pay someone else to live in one of your properties?  Worse, why would you help someone else (tenant) buy a property for you when that someone else is doing it for free (rent with positive cash flow)?

If you are doing it because of a different investment, then you are losing even more money.  The secret to REI is simple.  Find opportunities that will profit.  Profit is based on paying as little out of pocket (cash), and having someone else pay the rest (terms).  You don't make a profit until you have recovered all of your cost.  Your cost is only what comes out of your pocket (cash).  The more cash your spend, the more you have to recover and the less you have to assist in that recovery.

If you want a longer explanation,  PM me.

Nadir M. · Answer

@Curt Smith

I agree and I am. Took me 2 weeks to close on this cash out refi. Absolutely love my lender. I like to have cash in the account to invest as soon as I need it. I plan on investing it as soon as something comes up! I wish I had more doors, but I still have my day job for now, so I can afford the loss of CF to help me scale so I can go full-time RE

Maurice D. · Answer

Joe was asking you to provide all those number values, so he could give advice.  without numbers it's hard to give you an answer.

Property Value

Cash flow before refi

Current loan payment

Cash in property that you've personally put in

Equity in property

Terms on refi loan

Also, a HELOC is another option if you want to have access to cash, but don't know when.   why pay interest on money you take out and have it sit there in a bank account for months?  the Heloc allows you to draw, but until then you have the full cash flow you have today.

If you are flipping, the Heloc model allows you to put the money back between purchases.

Joe Villeneuve · Answer

PM.  I'll show you why that's not true.

Curt Smith · Answer

@Nadir M.  I've done 2 cash out refinances with finance of America which I do not recommend,  4 mo to close, and a miserable experience.   A 3rd near closing with lending home which I do recommend,  almost just 1 mo to close.   And nearly painless.  These 2 are commercial  Dscr lenders    no Dti requirements.   So us full timers csn still finance rentals 39 yr fixed at 4.25%  insanely low.

Big point;   you csn borrow when you don't need the cash on these good times.    If things turn down or if you really need some cash it's guaranteed you can't borrow  it.   Lol

I'm refi and parking the cash in the stock market,  spy and qqq.

2022 will need lots of dry powder IMHO.

But our over portfolio Ltv is very low so the loss of cash flow on just 3 doirs won't be noticed.

Even if cash fliw takes a reasonable hit, , if you have >>>reserves,   enough post refi cash fliw, ,,  do the refi at these crazy low rates.

Imho,   best to all

Nadir M. · Answer

@Joe Villeneuve

Cash out refi makes more sense to me because I still get cash flow and another property or asset

Joe Villeneuve · Answer

IF you're selling it, then replace it with another property that cash flows higher, you're cash flow is higher, and your property value increases, with the same equity.

Nadir M. · Answer

@Joe Villeneuve

All valid point. Leaving equity in property yes which doesn’t reduce my Cf even more. I can always sell to get that equity difference out. To me it’s a good method to grow quicker instead of the steady CF on a monthly basis

Joe Villeneuve · Answer

I'm not a big fan of the BRRRR method (I don't think of it as a strategy)...it leaves me in the cold.

It's not what it's billed out to be:

1 - When you refi your cash flow goes down (as you've stated)2 - You're still leaving a lot of equity in the property being financed, going to waste3 - It's NOT your money you're getting in cash anyway.  It's the Bank's money they are selling to you.  If it was your money, you wouldn't have to pay for it...would you.4 - I look at it as a linear return.  REI should always get you an exponential return.

5...and even more reasons why I don't like it.

Cash out refi or no?

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