Making a mistake with a cash-out refinance?

Question

I recently started the process of doing a cash-out refinance on my single investment property. It cash-flows at $700 a month. Mortgage balance is $130,000. Appraised at $357k, although past appraisals have been higher. The max amount they approved to be pulled out was $123k. This makes the property break even. I only have $30-40k though, so I’ve felt stuck with this single property.

I wanted to use the cash to do some fix and flips and in the rare event a BRRRR presented itself early on, go that route and then continue with fix and flips. The market I'm looking at has plenty of houses in the 30-50k range that could be fixed. However, I'm wondering if I should have simply sold my investment property and used the full $220k-ish I would have had then. Was my move probably the least effective method?

P.S.: I also did not enjoy the $18k in closing on this number. Insanely high from what I was expecting.

Jay Hurst · Answer

@Axel Scaggs  You are NOT locked in until you sign the closing documents. Assuming you credit score is 770 that is an awful loan, and you should NOT close with those terms.

AJ Exner · Answer

$10k in Origination is tough, ~3.5 points + lender fee sounds like did the heavy lifting, plus title/prop tax in TX can add up quickly.

As for the numbers, I think its easier to regret not selling in the short term, but the hope is for long-term gains/appreciation. If they can cover your mortgage and you can slowly payoff a 350k property over time, that should give you a good equity position in no time.

Plus, if rates get better that will always help. 30k-40k + Cash-out proceeds should put you in a great spot to snatch up a few of those 30-50k properties to fix up and scale.

I wouldn't be upset, sounds like you are in a good spot.

Andrew Zamboroski · Answer

While the fees are a little tough to stomach, as long as the end game outweighs the cost, I hope you will be okay on this one! Granted you did not pull as much out as a sale, but, you do own an asset still which is a huge win!

Alan Lacey · Answer

I would certainly recommend shopping that around a bit just to make sure that is best available. Assuming dscr because that would be too much in fees to be allowed on a conventional deal

Ben Fernandez · Answer

Although you'd encounter the variable rate, why not pursue a line of credit? That way when you find an investment you write the check. Versus with the cash out refinance you start paying on the debt from day one and haven't found your new investment yet...That'll just eat away at your positive cash flow way too early.

Also, try to optimize your operations in the asset you're leveraging the equity on as much as possible before pulling the trigger. Be certain you have properly accounted for capex in your operating expenses as well. You must be prepared if a repair/replacement arises being that it sounds as though you'll be at max usage of your leverage, accessible cash and your cash flow will be washed. (Know your break even point occupancy as well.)

Overall, breaking even isn't bad. You just need to make sure the equity you're utilizing provides a return. Whether that be a lump sum payoff (flip or BRRRR) or if its another buy and hold. Ideally, it'll be the flip or BRRRR so you don't encounter a stopping point where you're waiting on equity to rebuild (before you can invest again).

Jay Hurst · Answer

If we were doing the loan, Box A (origination fees) at 75% loan to value with a 770 middle credit score on a single family home at 7.5% would be like 900 dollars, your box A is 10k.  and doubtful anyone that is trying to get the margins they are trying to get from you would be able to do the loan much cheaper, but more then that why would you award them for trying to job you but getting caught?

Axel Scaggs · Answer

I may be too far along in the process to back out now. I’m not super familiar with refinances, but I’d assume there’s a grace period to pull out and I have probably passed that by now.

Chris Barrett · Answer

If you don't have a project to fund yet, I would rather get a HELOC than cash out refi. Also those fees seem really high unless it's a DSCR with few requirements.

Axel Scaggs · Answer

Ok thank you for the advice, I’ll look elsewhere. What is a generally expected closing cost on a loan of that amount? I was expecting $7-10k. Second, would this lender modify the fees if I presented a competing offer? Or is that not a typical thing to do.

Patrick Roberts · Answer

Agree

Making a mistake with a cash-out refinance?

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