Good time to Cash Out Refinance?

Question

Hey Guys,

I have a duplex with 100% equity that's probably worth around $325k and is rented for a gross total of $2,450/mo. I'm looking to buy a rental to rent as an Airbnb. I'm wondering if it would be a good idea to take advantage of this market (before it really takes a downturn) and cash-out-refinance and sit on the cash until I can find the next good deal. If it's worth $325k, which is conservative, I'd likely be able to walk away with somewhere around $225k which would decrease my cashflow from about $1,850 to about $700/month. The Airbnb range I was looking to be in would be around $300-400k so I would be taking out another mortgage but of course making sure the numbers would make sense and would generate more than the original net $1,850/mo that I'm sitting on now. Let me know your thoughts - this would only be my second rental so I'm very new and trying to make sure I cover all my bases.

Thanks!

Mike

Jaron Walling · Answer

If I owned a property free and clear, had 6 months of reserves, and meet the personal requirements a lender asks for I'd be tapping that equity ASAP. You want liquid funds on hand for deals just like @Scott E. mentioned. Otherwise "deals" just pass you by... That property is a treasure chest of gold (wealth) but it's not allowing you go grow. Some investors love collecting treasure chests. I'm friends with an investor and he bought every property with cash. Took him about 15 years to buy them. He has completely de-levered his 30 SFR assets. For him it's easy to retire tomorrow if he wanted. His strategy is completely different than mine. Ask your self do you like debt? Can you manage the storm if it happens?

Nathan Gesner · Answer

What, exactly, are you "taking advantage of" in this market? Rates are no longer low. Prices are high, disconnected from reality due to unwise frenzy shoppers, and likely to go down in the very near future. Short-term rental performance has been above historical norms for two years and I'll bet dollars to bagels that it won't stay that way.

Now's not a good time to venture into something new, particularly higher risk.

Mike Sangapore · Answer

Well properties in my area seem to be dropping quite a bit compared to 6 months ago - I’m not convinced that it will *really* take a downturn, I just want to be prepared in case it does. And thank you for the HELOC suggestion - I think that might be a good plan as well. I suppose I didn’t care so much about having to start paying off immediately because I wouldn’t have to dig into my pockets and still cash flow nicely.

Timothy Hero · Answer

I don't think rate should be your focus. You're sitting on over $300k in cash that's doing absolutely nothing.

Even if your rate is 7% on the refinance, the proceeds will allow you to buy another 1-2 properties.

Value: $325k

Loan: 75% LTV ($243k)

Walk with $234k after escrow and closing costs.

$234k with 20% down + closing costs will get you around $825k more in properties.

Mike Sangapore · Answer

I appreciate your feedback! What I'm looking to 'take advantage of' is 60% the opportunity I have in front of me, 40% the market itself. Having 100% equity in the property and not doing anything with it seems silly to me. Prices are still high and, although interest rates are no longer low, my job as a wholesaler is to find properties and acquire them at a discount. If I can pull my equity out (whether a HELOC or cash out) of what is still a hot market and find a good deal(s), it seems like a good time to do so - as long as the acquisition numbers make sense of course.

Mike Sangapore · Answer

Thank you Josh! I appreciate the feedback. Definitely going to shop around for good HELOC options - any recommendations would be much appreciated!

Steven Foster Wilson · Answer

I have only regretted things when I did not try hard enough. I feel you should go for it. What are you gaining by waiting? I would put an option of buying a multi-family home though and seeing how much passive income you could get from that? You could easily pick up a great property (or multiple) in Ohio with that money that will cashflow and appreciate.

Joshua Messinger · Answer

Hey @Mike Sangapore!

I like the idea of cash-out refinancing and am assuming you'd like to go the 1031 route if you're looking for something within the same price range as where you are at right now. But, I agree with @Scott E. 100% on this one. If you don't have to pull out all of your equity at once then why would you? This way you can utilize more than one HELOC at once and get more properties than just one this way you are dealing with a lower overhead on each property and dealing with a higher scale.

Otherwise, if something works out conservatively numbers wise I would jump the gun on it ASAP. You seem like you're in a position to move forward so get it done!

I hope this helped and if you ever need anything don't hesitate to reach out! Keep crushing it!!

All the best,

Josh

Good time to Cash Out Refinance?

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