What am I missing with this FHA cash out refinance?

Question

I've gotten great advice here from both experienced and newbie investors so I'm once again turning to my favorite forum for advice.

Currently house hacking and one year later I am ready to pull out some cash for my next deal. Lender said I can pull out $20k at 3.875%. I have to keep it as an FHA because my DTI so the pesky PMI stays. Overall the property cash flows about $500 but I recently got the taxes appealed so it will cash flow another $150. If I cash out, I lose that newly "earned" $150 so basically everything will stay the same.

I don't know if I should be looking at in terms of whether I should pull out the $20k. I know over time it will end up costing me more with interest but since it's being paid off by the tenants, does it matter?

Anything I should ask my lender or numbers to run before I pull the trigger that I may be missing?

I plan to buy my second house hack in about 1.5-2 years with that money and keep some for any repairs. Is it smart to hold on to cash that's pulled out for future use since you pay interest from day one?

Jeff Kehl · Answer

@Sam G. Yes absolutely HELOC will be based on a new appraisal and is the best thing for you to do. Gives you options and you're not paying on it if you don't borrow it. It seems to me you've taken a really good first step with house hacking but you're itching to do more but at the same time want to be careful not to overextend yourself. I applaud that line of thinking, you seem to be on a good path.

But let me suggest something to do with the HELOC until you're ready to move to your next house hack. Look into using it as the down payment on a BRRRR property. Find something under market using a wholesaler or better yet, find it yourself by driving around. Fix it up and rent and refinance to get the money back and do another.

Ralph R. · Answer

@Sam G.

Sam why are you going to pay for a refi 1-2 years before you need the money? Won't you get more cash in 2 years than you will today?  Also to the cost of interest don't forget to add the $150 a month you will miss for the life of the loan.  The way I look at it a bird in the hand ($150 a month additional income) is worth 2 in the bush. $650 a month is damn good cashflow out of a  small MF.  I don't know where you are at, or the rest of your finances but in my market I don't get much bang for $20K, and I probably could save close to that in 1-2 Years.  Besides all that why wouldn't you get a HELOC if you live in the property??? cheaper loan processing, you don't pay anything until you use the money, and then often times its only interest.  The HELOCS I've looked at are close too or cheaper interest than a full blown re-fi.  They loan 75-80%  of your equity same as a cash out REFI.  oh yeah you would still get that extra 150 a month until you actually used the money from the HELOC.  (almost forgot no PMI on a HELOC)  All that aside it doesn't make sense to leverage all your properties to the max.  what happens if the market goes south? now your MF is mortgaged to the hilt, and a big payment is necessary every month and rents fall?  Your gonna wish you were getting that extra $150 a month instead of not having the income and having the bigger payment. The way I see it, its a $300 dollar a month loss.  150 dollars less profit and 150 dollars  going out.

Buying real estate/ investing is a combination of things.  you gotta live BELOW your means.  You have to save the excess money from doing that.  You don't borrow what you don't need.  If your doing real estate you have to go slooow.  Go to fast and your portfolios foundation will crumble.  (too much debt too little rental income)  That foundation is the first properties you buy.  They will be paid off first, always have the most equity, and keep your new purchases afloat until they settle in.  Make it strong!!  Don't borrow money just because you "might need it," and remember Rome wasn't built in a day.

RR

David Dachtera · Answer

@Sam G.,

Rather than what would it cost me to borrow out that $20K, the question in mind would be how much would that $20K earn over and above the cost to borrow it out?

That's how I would look at it.

My $0.02...

Sam G. · Answer

RR,

I did account for a percentage of the rent for repairs before the $500 but since I have had the house for only a year, I do not feel that my reserves are where I need them to be to ensure that I'm totally comfortable with any surprise repairs. I think that also has to do with new investor jitters. Hopefully I will be as confident with things as you all are :)

I got some great information & feedback and will def look at my situation and short term goals as Louise stated to see what's best. You guys have certainly opened my eyes with the HELOC option as well. Exaclty why I love BP! :)

Louise A. · Answer

@Sam G.

Definitely a vote for the HELOC.  I have them so that I can use them like piggy banks.  The only real issue is that interest rates are going to go up at some point, and those HELOC rates are floating.  If you take the $20K with the refi now, you can lock in that low interest rate for 30 years.  I think its personal preference based on your situation and what your short term goals are.  Good luck!

Ralph R. · Answer

@Sam G.

Remember Sam if you have the HELOC in place you are still getting the 150 a month and pocketing it until you use the HELOC.   The big pitfall is most people who get access to a bigger sum of money tend to spend it. It takes discipline to keep it until you find the right deal. If you did due diligence on your MF you should know about any major repairs. You said you had 500 dollars CF. a month. Didn't you account for some percentage of the rent for repairs BEFORE the $500??  R R

Sam G. · Answer

Does anybody know if a HELOC can be given based on an an increased valuation since the purchase and not necessarily the paid down equity in the home.

Arpan Patel · Answer

The HELOC sounds like the best options. It is there is you need it and it as low setup and maintenance costs. Only charged on what you use so if you have some major repairs then you have that HELOC to fall back on. I don't think you should just take that 20k right off the table because if nothing happens, you are still paying interest for that 20k. If something does happen, in both scenarios (HELOC and complete refinance) you will have that 20k available.

-AP

Sam G. · Answer

RR awesome reply! So although I'd like to buy now but I am back in school and will not have the same income to qualify for a new loan if I wanted to buy now. Also, I don't want to spread myself too thin. My cash out is made possible because of appreciation. I am thinking about pulling the money out now in case I have any big repairs while I am in school and hopefully will be ready to buy when I am done. For some reason I worry that I will not have the opportunity to cash out later at a good rate or qualify for the same thing later if valuation changes. I will look into the HELOC though & reread your reply to learn!

Brent Coombs · Answer

@Sam G., what's stopping you from putting the $20k into another deal NOW (either 20-25% deposit on a non-FHA loan, or a lot less percentage on your next FHA one)? Are you even looking? Seems like the only thing you're missing is that actual cracker of a multi-plex deal! Cheers...

What am I missing with this FHA cash out refinance?

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