Cash out refinance for down payment on owner-occupied multifamily

[Jace Buxton]

Hey BP community,

So my wife and I purchased a townhome back in 2015. It was an FHA loan at 3.5%, and we currently owe around 97,000. The Zillow estimate is about 178,000, so we have a decent amount of equity.

We are moving out of state this year. I want to purchase an owner-occupied multifamily property (preferably a fourplex) and rent out the other three units. Originally, I was planning on selling our current house and then using the proceeds as a down payment.

However, I was also considering a cash out refinance to convert my current loan to a conventional loan and then I would rent out our townhome, and use the cash out as the down payment for an FHA loan on a second property, such as an owner-occupied fourplex. The best interest rate I could get for refinancing right now is around 4.8%, but I would no longer be paying mortgage insurance from the FHA. I could rent out the townhome for about $1100 and the mortgage payment each month would be around $760.

I haven't started looking for multifamily properties yet, but we can stay with family while we wait for a good deal.

Basically, does it make sense to cash out refinance and get a higher interest rate, just so I can have potential for more cash flow? Or would I be better off selling our townhome?

[Kenny Buyers]

I like where your head is at, however I'm surprised you can't rent your townhouse out for more than $1,100 with it being estimated to be worth $178,000. You should read up on the 1% rule that BP talks about all the time. 

I don't think your townhouse will cash flow with a $760 mortgage while collecting $1,100 in rent. Other expenses to consider: taxes, property management, repairs, and vacancy will eat away at that margin. 

I rather take the equity you've built and use it as two down payments for properties closer to where you are moving if the market is fitting.