Is there a recommended limit when Cash Out Refinancing??

Question

After buying our first rental last fall with cash (LLC with business partner), we are currently refinancing the first property to a cash out refinance in order to invest in second property. The appraisal came back alot higher than we expected and the bank is allowing 80% LTV, which is way higher than we want to take out due to our rent. After considering PITI, cap. expenditures, repairs, vacancy, we were shooting for $250/mo net, which is achievable, but based on our appraisal, we can take out alot more money and have a zero net. Is there any advantage to maxing out our LTV on our first rental, so that we can have extra $$ for the next house, or does it depend on the next deal? We have the next deal lined up, and we are approved, just need to let the bank know what we need. Current decision is to take out 60%, leaving us with $120/mo after (PITI, cap. expenditures, repairs, vacancy,) and this will fund the purchase and rehab of the next investment property. Thanks in advance to any insight.

Clayton Smith · Answer

Congrats that is certainly a great problem to have. I think you are correct in not wanting to make your payment more than than you will net once it is rented. Negative cash flow is not a good thing. I think you should consider two options.

Option 1: Sell the house using a 1031 exchange. If the appraised value is correct then you can use the proceeds to invest in other properties to buy and hold for more cash flow. However if you are in a market that you believe will appreciate in the next few years a 1031 exchange will mean you miss out on the appreciation.

Option 2: Do the cash out refi for 60% LTV to ensure you have a cash flowing property. Then you can use a HELOC to access the rest of you equity, in most cases up to 90% LTV. A HELOC will give you a line of credit that you only pay interest on if you are using the funds. This is a great option in my opinion for two reasons. If you are looking for new properties the money is sitting in you credit account ready for same day access, so you can move quickly. If you were to cash out refi the 80% LTV you would essentially be paying for that money monthly with a negative cash flowing property.

Hope this helps and good luck.

Also, I am currently trying to perform a cash out refi and I can not find a bank to go past 75% LTV. Are you using a local bank or national? Can you give me the name of your bank? I would love to find a bank that will cash out 80% LTV of my SFH property.

JD Martin · Answer

In theory: if you can't go 80% LTV and still cash flow it's probably not a very good property as a rental. There are exceptions to this, mostly in super-high value areas where there's a ceiling on rents (i.e. it nowhere near meets the "1% rule") or in an area that has rapid appreciation but rents haven't moved, but beyond that a property that can't pay for itself when you leave 20% behind is a risky proposition. Based on that, if you plan on keeping this property, you will be safer (assuming you have no intention of walking from the loan) if you have less leverage, i.e. your proposed 60% level.

Justin Wilkey · Answer

@Clayton Smith's Option 2 is definitely a good take. I will add that you should make sure you look at the total picture of all your investments. Negative cash flow may seem counter intuitive but if it enables you to make a different high cash flow deal it would make sense. I did just encounter something along these lines with a cash out refi and the numbers made sense to maximize the financing. When you consider that rates are super low right now, financing is tax deductible, and I found a decent savings account interest rate (~2%) it quickly closed the gap on the interest payment. I'm making a small profit for doing nothing and now I have the cash ready for the next deal.

Bruce Weisenburgh · Answer

JD, Thanks for the response and great point on the value/cash flow at the 80% LTV, one point is that we think the appraisal was higher than we could sell anyways based on our own comps, so we do have a small profit at 80% of what we believe the true selling point is. We're definitely looking at the option #2 for now @ 60% to be safe. Thanks again for the great input!

Bruce Weisenburgh · Answer

Justin, great to hear from a fellow Cincy investor! As we are newbies, it's great to get feedback especially from the locals! Also, thanks for the feedback on smaller/no profit based on the next 'bigger' deal. Since we have the next deal lined up, our 60% covers the buy and rehab to put a new renter in it. (Option #2), and hopefully we can HELOC and have some non-interest paying monies available for the 'unknowns' that I'm sure will arise. BTW, do you attend the local REI meetings?

Bruce Weisenburgh · Answer

Clayton,

Thanks for the response, and agree, don't think we want the negative cash flow either. We're in Cincinnati, great market, hopefully still growing over the next years, and we're definitely in this for the long haul with the BRRRR strategy. I do like the Option 2, as we hadn't thought about that, and I've already reached out to the broker and asked this question. I'll pm you the bank we're using as we are not working with them directly but through the broker I mentioned. Thanks again for the quick response and I'll be in touch soon.

All the best,

Bruce

Is there a recommended limit when Cash Out Refinancing??

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