Hold cash or refinance?

Question

Hi All,

Wanted to get your thoughts on if we should hold a house cash or do a cash out refinance? The details: "All in" after rehab at $145,000

Tenant in place at $1,550/month

We can do a cash out refinance into a 30-year fixed loan (no prepayment penalty) at 7.75% interest with the loan amount at $155,000. Or, just keep holding it cash.

(I know the simple answer is "it depends on what you would do with the cash if you refinance it", but wanted to see if there's anything I might be missing - i.e. worth refinancing given the tax write off of paying interest on the loan)

John Morgan · Answer

@Keegan Darby

I’m a fan of cash outs. I did this with my first rental I paid 130k for. I cashed out and got 140k after closing costs a few years after I bought it. I used that cash to BRRRR a house. Then repeated and BRRRR’d another house. Then BRRRR’d another house except I still haven’t done the cash out refi on the last house I own outright. So I basically got 3 houses for free from my original cash out refi on my first paid off house. And the last house I bought with the cash is paid off. My cash flow went from about $1000/month net with just my first paid off house to $2800/month net with those 4 houses. My cash flow about tripled and I got three more houses basically for free from my original cash out refi. Dave Ramsey would yell at me for doing this, but this is how I’ve scaled up. I’ve bought 12 houses for free with no out of pocket expenses basically from using $ from cash out refis to scale up. Many people tell me I’m over leveraged and should scale like this. But my cash flow went from only $1000/month net from one paid off rental to 13k/month with 18 rentals by doing this strategy.

Andrew Freed · Answer

@Keegan Darby - What is your current debt now? Is it in the 3-4% range? If so, that debt is an asset. I am holding onto all of my 3-4% debt as much as possible. With inflation so high, that debt only amplifies your returns.

Additionally, if you refinance into a 7.75%, that will eliminate most of the cash flow most likely. Is there a reason the debt is so high? Investment loans via the conventional route are in the mid 6's for the lenders I use. I'm just curious because debt costs can make or break a deal.

Jaron Walling · Answer

@Keegan Darby It depends on your comfort level, strategy, and speed you want to grow. Leverage is powerful and dangerous. If you're young you want to acquire and hold property. Your post doesn't read... 55 y/o, scaling back, selling my 10 paid off units. You're scaling up not down. Run the numbers and calculate the ROI at 60, 65, 70 LTV at 7.75%. The lender isn't forcing you to max out the loan.

Most investors I follow are deleveraging but actively buying when the numbers are right. In most markets the numbers are terrible... not a lot of cash-flow rentals without rehab, creative financing, seller financing, etc. My statement is market specific but we cash-flow in the mid-west. Your property appears to meet the 1% rule so in my mind you have options. I'd be leveraging (something) and holding reserves for rainy days.

John Chong · Answer

If there's enough margin I would refinance out and look at acquiring another property. That way you keep doing the BRRRR method and build up a large portfolio

Keegan Darby · Answer

Thank you, Dave. The challenge is if I do the cash out, then put that money into an account that earns say 6%, I would've been better off not doing the refi as the rate will be 7.25%+

Timothy Hero · Answer

Being a mortgage broker, I'm biased. But equity in a rental is 100% useless if you don't utilize it. It's like storing away wealth in a retirement account when you never plan to retire or use it.

Pulling the cash-out is tax free and allows you to grow your portfolio. If you're not utilizing leverage in real estate, you're better off putting your money in stocks.

Just my opinion.

Zach Edelman · Answer

With no PPP I personally like the idea of doing the cash-out refinance here. 7.75% is also a pretty decent rate historically.

Jay Hurst · Answer

Assuming good credit at that loan to value you should be able to better on rate. Every little bit helps on these type of situations as the test will be what you can generate return on the next project you invest and if you can beat what you are paying for the funds.

But, the only way to truly scale for most people is to use the same funds over and over.  So, cash out refi's have to have a place in that strategy. I have noticed the higher rates have made some people penny wise but pound foolish meaning they are passing on profitable deals because they cannot get the rate the "want".  They tell me they have a chance to buy a property at 60%-65% loan to value but it only works if they can get the funds at some certain rate. But, that just not make sense if you look at the investments as a group, not individual. Paying a 100 more a month IS worth getting a property with 100k built in equity for example.

Dave Skow · Answer

@Keegan Darby- gotcha .....if all you are going to do is to invest the funds to try to beat the mortgage rate - thats  a losing  battle and not sworth doing ( obviously )  ...if you  plan to use the cash for  something else  like buying another  proeprty - then it might make sense

Dave Skow · Answer

@Keegan Darby- thanks - if the property can still cash flow postitively  and you can use the  extra  cash - do the  refinance ...if not - dont

Hold cash or refinance?

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