Cash Out Refinance Advice

[Matt Medina]

Hello all!

I bought my first property in Southern California this year in March. In my opinion I bought at a great time, interest rates were low (2.6%), and I got the house under asking (in CA, hard to come by). 

My future goal, like many of us, is to own rental properties. The city (Temecula, CA) I bought in is growing, safe and has high potential for rental due to the job opportunities and military base near the area. I put down 5% ( conventional loan ) with the goal to save as much capital as possible. The house was move in ready, so I haven't forced much appreciation into the home other than Vinyl fencing and small upgrades to the landscaping. However, looking at the comps in my area, 2 homes in the the same neighborhood sold for 100k more within the last month. These homes appeared to have no major upgrades over my home, which makes me believe my home may appraise for a value close to what these comps sold for. Knowing that the value will eventually go down when the market settles down, I want to take advantage of the equity while I have it! The goal with this equity would be to invest into my next property. 

My current mortgage is just under $2500. According to Zillow, they estimate I could rent my home for $2800 per month. But looking at other rentals, I would lean on the conservative side and say I could get $2400-$2600 a month for the property. Yes, this property is on the cusp of being able to cash flow, but with prices in CA, I thought I did pretty good for my first property.

So my dilemma ( or lack of knowledge ). To my understanding, if I cash-out refinance my monthly mortgage will increase due to 3 factors. The value will go up, the interest rate will increase from my current 2.6%, and my PMI will go up ( currently $80 ). Pulling out the equity would increase my current mortgage and possibly make it a negative cash flow property.

My questions are, 

1. Any suggestions on how to calculate what my new mortgage would be if I were to Cash out refinance?

2. Would the negative cash flow be worth having the equity in hand to purchase a new property?

3. Would the better option be to keep the equity in the home and buy a new property with saving money the old fashion way.

Thank you everyone who takes the time to help! 

Have a great day!

[Doug Spence]

@Matt Medina Congrats on your first property! Make sure you're doing a thorough rental analysis of the property both with your current mortgage and after you refi. If your mortgage is $2500 and you rent it for $2400-$2600, you are probably going to be in the negative every month after you account for vacancy, expenses, capex, property management, etc. This is not necessarily a BAD thing, as you're really just treading water month to month while the property appreciates over the years. But if your goal is to generate cash flow every month with this property, then its probably not going to hit your goals for the first couple of year until rents go up more.

Just want to make sure you're going into it eyes wide open. 

1. I would reach out to a local mortgage lender so they can give you cold, hard data on your refi. This info may make it an overwhelming "no" for you. I can recommend a local lender to you if you want.

2. The answer depends on your long term goals. Would this second property also be in Temecula? Or would you be using the capital to buy in a different market? (more affordable, higher cash flow market like the midwest/southeast)

3. It depends on your goals! What would you do with the money? What return would you expect to get? Would that return offset the negative cash flow of your Temecula house?

Best of luck and keep us updated!