A danger of rapidly increasing home vaules...the cashout refi

[Mike Terry]

Something occurred to me today as my neighbor just sold his home for 200k more than he paid for it 18 months ago... beware of the cashout refinance.  It is different this time.  It always is.  It is hard to recognize the danger signs when your in it and the FOMO is bubbling over.  The wealth effect of rapid appreciation may show up as overzealous cash outs.  I am thrilled for my neighbor and people selling into the strength of this lava hot housing market. It also bodes well for my own families net worth, but the temptation to realize some gains can be dangerous if this extreme supply shortage driven by the pandemic is short lived.  Just imagine if the average homeowner grabs some equity, they spend it like most consumers on a boat/RV or a new car or a pandemic ending celebration vacation and then interest rates rise, the hotair comes out of the housing market, prices contract and you can imagine the results if we do have an economic slowdown.  As real estate investors we are wise to always be assesing risk and anticipating dangers to our portfolios and the economies we operate in. Keep an eye on cash out refis and heloc utilization rates.  Would love to hear other investors thoughts on this.

[Max T.]

@Mike Terry

Ideally the cash out is used for the next investment not the yacht.

And ideally the rents justify the higher debt service. So as long as the place stays rented you are ok. Just don’t sell.

And ideally the refi is a 30 year fixed. So rates rising later won’t matter.