What would you do with this cash out? Worth it or not?

Question

Hey everyone! I always appreciate the help and thoughts on Realistate subjects. These forums are awesome. So I’m at the cross roads with my currently property. I have 104k in equity I can pull out. I spoke with a VA lender yesterday since the current loan I have is VA. My original loan is 436k on a duplex and it is now worth around 560k give or take. I am able to take out 100% LTV. This is the decision I need to make if it is worth it or not?… The new loan terms would be

560k. 3.5% interest rate with total month being $2759

= 104k in pocket

Current loan

436k. 2.25% interest rate with Monthly being $1926

My biggest thing is the interest rate jump. Would it be worth taking the equity out to buy another property? And what would you do with it?

Respectfully,

Steven M.

Dan H. · Answer

Conventional home loans are the closest thing to free money as there is.  However, you never want to be in an over leverage situation that could result in forcing you to sell at an inopportune time.

The way I look at it the difference between what you pay and what return you achieve is profit.  Can you achieve long term return above 3.5%?  S&P 500 is passive and has lifetime return near 10%.  Syndicators typically can produce even better return but with some potential increased risk.  My active investments (which require work and time), I typically achieve returns in a different stratosphere than 3.5% (most of my RE investments are infinite return as they have had all investment extracted).  The point is that there are many options that should be able to out produce 3.5% over the long term and these options vary in how much work they take (S&P 500 is passive, BRRRR or flip is very active).  Research the best option for your desired passivity, risk, and desired return.

I would not have issues with the increased rate as long as 1) the increased LTV does not place you in an over leverage situation 2) you plan on investing the money in an investment that is likely to, over the long term, return significantly better than 3.5% (as the one investor indicated, do not use the money to buy a boat).  You should be able to easily find investment options that are very likely to achieve better return than 3.5% over the long term.

Good luck

Steve Milford · Answer

All that really matters is, with what do you want to do with the money, is the cost worth it? The rate is really irrelevant except for the long term. I.e. If I finance rehab material costs through HD or through my hard money lender, they are about equal as the financing costs because the line of credit is only open a short time. So....

If you just put it in the bank, is it worth paying an extra $833 per month, for that right?

Can you find an investment that will cover that $833 cost?

If you buy another property with that as down like you suggest, does the $833 plus additional cost of a new mortgage get paid for with the rent you would receive?

Whether or not the "money is dead" as equity or sitting in the bank, if it isn't earning a higher return versus what it is costing you then it isn't helping you. Or vice versa, if you can make it earn a higher return elsewhere, take advantage of it.

If I was you, I would only take money out to either give me a cushion (if I didn't have one already) and or if I could leverage it elsewhere to make more money.

Steve

Matthew Crivelli · Answer

@Steven Macdonald Leave the 10% and take the better rate! Imagine if the market dropped and all of a sudden you were upside down! Better to keep the 10% parked!

Matthew Crivelli · Answer

I think the extra 1% is worth taking the cash if you are planning on expanding your rental portfolio. If you plan on buying a boat I would say leave the equity where it is. Also why not take less LTV to get the payment down? You could use the money for a down payment on an add value situation, (private bridge loan) refi out of the bridge loan into a 30 year and cash out the new property to repeat the process.

Joe S. · Answer

An active investor can turn that equity into a whole lot more than the increased monthly amount you referred to. Keep in mind not everyone is an active investor or really knows what they’re doing. Just because someone calls themselves an investor does not make themselves one that is knowledgeable etc.

Steven Macdonald · Answer

@Dan Heuschele ok understandable! Those are great points! I appreciate the words of wisdom! I think I’m going to go through with the cash out and try to shoot for the brrr method on this one. You take care Dan. Best of luck to you as well!

Dan H. · Answer

I have a lot of refi experience but minimal HELOC experience.  HELOC on investment (non owner occupied) properties are provided by few sources.  Around 2 years ago I last investigated this non owner occupied option (and have my info from that research effort), seeing you are owner occupied you should have many more options.  I do not know what ltv you can get owner occupied.

I have mostly non-oo properties were HELOC are harder to find, but on my primary this is my mindset.  Most HELOC are adjustable rate.  I use HELOC or margin loans (loans against assets other than RE - both variable rate) for loans that are expected to be short term (such as to purchase were I expect to rehab and refi in less than a year).  I refinance for money that I expect to need for a longer term (such as purchasing a property with no value add).  This is because I like the safety of a 30 year fixed rate loans.  In addition the fixed rate loans are so low that the adjustable loans present little savings in interest rate.  The HELOC usually have lower costs, but for longer term loans the cost when spread across the loan period(I have never had a loan over 15 years) is small. if you plan to have the loan for a long duration, you may want to consider a refi over a HELOC due to the fixed rate.

Good luck

Steven Macdonald · Answer

@Dan Heuschele I appreciate the time you took to answer my post. That is huge. Everything makes complete sense when your explaining rate of return on investment. I’m honestly leaning more towards the 100% LTV just because I know I can get a rate of return higher than 3.5%. And also have another property I can leverage incase of a pinch. Thank you so much again for clarifying things! Also have you ever heard of anyone getting a heloc with 100 LTV before?

Steven Macdonald · Answer

@Matthew Crivelli thank you for the reply. I actually haven’t looked too much into a bridge loan at all. I’m not too savvy on them. I will defiantly check that out! Thank you for that. Also i could pull out 90LTV with an interest rate of 2.75. For 50k. Still trying to weigh all my options. Just jumping from a 2.25 to 3.5 on 560k just makes me a little nervous to know if it’s worth it. Also I have a property in Vancouver WA as a rental that I am also looking at using the money for an ADU which cost 120k to build and should generate 1500 a month in revenue. But the CAP rate might not be as high as using it as the down payment option. I appreciate the input!!

What would you do with this cash out? Worth it or not?

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