Cash out refinance: is it a good idea?

Question

I’m looking into doing a cash out refinance to use my equity to purchase a 2nd rental property. However, after crunching the numbers on a potential 2nd unit, there’s a risk that my cash flow remains flat. Do you think it’s still a good idea to do a cash out refinance, purchase a 2nd property, but have the same cash flow?

The reason for this is two fold. I lived in my current property so I was able to pay just 10% down. I now have just shy of 20% down. I’d have to maintain 25% equity on the cash out refinance. Naturally my monthly payments increase. In addition, the property I’m looking to buy is pricey and I’m anticipating lower than usual rent because of COVID.

Please let me know your thoughts!

Jaysen Medhurst · Answer

This really depends on a few factors, @Paul Park.

• First and foremost, how good a rental is your former primary? Have you done a full rental analysis? This does not mean Rent minus PITI. You have to take into account all expenses: Vacancy, Repairs, CapEx, and Management. A lot of people think their primary residences will make a good rental property, most of them are wrong.
• What do the numbers look like on the new rental? Make sure it's a solid, solid deal before going into a potential $0 cash flow situation. If you're wrong just a little, you're in the red.
• Do you have additional cash each month to perhaps aggressively pay off the DP on the second rental?
• What kind of appreciation are you expecting? I very much believe that you shouldn't buy an investment property that can't support itself. Though it may be worth considering, IF there is strong appreciation in your market AND you are financially capable of floating that property (maybe for years) without it causing a problem.