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AndyJ
Member since Jul 2008
1861 posts

Should I cash out refinance my home, and use the money for an income property?
I’m finally ready to buy real estate as an investment. My wife and I have plenty of equity in our house (approximately 40% equity). My thought is: take out cash and refinance at a lower rate (have 9 years left but increase to 15... ok since we are 40 and can still pay it off early). That cash can be used to pay a down payment on a rental... the rental mortgage rate will be higher, so a good down payment will lead to better cash flow.

In my head my plan is so perfect, I must be missing something.


Lsutiger2424
LSU Fan
Member since Dec 2016
876 posts

re: Should I cash out refinance my home, and use the money for an income property?
I’d hold off on the rental.


Dawgfanman
LSU Fan
Member since Jun 2015
10660 posts
 Online 

re: Should I cash out refinance my home, and use the money for an income property?
Yeah, you’re missing the part where people aren’t paying their rent right now. How would your plan look if you can’t collect rent on your rental for 3-6 months and at the same time you need to put a roof on it? In other words, what do things look like when Murphy and his law decides to give you an arse kicking?



go ta hell ole miss
New York Yankees Fan
Member since Jan 2007
8180 posts

re: Should I cash out refinance my home, and use the money for an income property?
quote:

My thought is: take out cash and refinance at a lower rate (have 9 years left but increase to 15... ok since we are 40 and can still pay it off early


Have you checked numbers on this? Typically you want no more than 80/20 to avoid PMI and if you do a cash out refi you pay a higher mortgage rate. Also, changing your mortgage to a 15 year may not lower your payment. Seems like a terrible time to be buying right now in the south. If you are buying one and not selling another I would wait. Market is starting to turn quickly out west and has been bad in NYC for a while, which were leading indicators of what it will look like here soon during the last housing downturn.

Having said all of that, I know people that have done it. They just made the move, regardless of what others said. One made a lot of money, one did not. I was jealous of their entrepreneurial spirit and willingness to take risks. They eventually became jealous of my free time and freedoms from worry about another house and bothersome tenants.
This post was edited on 5/14 at 7:12 am


AndyJ
Member since Jul 2008
1861 posts

re: Should I cash out refinance my home, and use the money for an income property?
Thanks a bunch. I do t want to buy one today, but I’d I started the process of a refinance, I imagine that would be a couple of months. Then Searching for properties would be a few months. I figure by then I could actually start to see some trends in the real estate market.

I guess what I was trying to ask was... since rentals have higher interest rates, but my home refinance would be down to 2.75%, wouldn’t it be better to use more equity from my house (at the lower interest rate) for a down payment so that I’d be borrowing less at a higher interest rate (for the rental)?


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AndyJ
Member since Jul 2008
1861 posts

re: Should I cash out refinance my home, and use the money for an income property?
You’re right that this is not the right moment... but maybe in a year or so I’ll be able to see where things are


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SDVTiger
Hawaii Fan
Off the Wall
Member since Nov 2011
44326 posts

re: Should I cash out refinance my home, and use the money for an income property?
Cash out and buy that property
Best time is right now



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tigersfan1989
LSU Fan
Louisiana
Member since Oct 2018
362 posts

re: Should I cash out refinance my home, and use the money for an income property?
I think you have a good plan. The only downfall is you won’t be able to write off on taxes your personal home interest like you would be able to on your rental loan interest. But it sounds like what you would save on interest would still be more compared to the tax write off.


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yellowhammer2098
Alabama Fan
New Orleans, LA
Member since Mar 2013
3826 posts

re: Should I cash out refinance my home, and use the money for an income property?
quote:

Yeah, you’re missing the part where people aren’t paying their rent right now.


This surprisingly isn't really true. Collections have been surprisingly strong across the country.

With that being said, if you own a SFR rental, if your one tenant isn't able to pay rent you're hurting the same regardless of how "overall" collections are.

To OP, my prediction is that you'll see lower real estate values in the fall/winter of this year than we're seeing right now. Like I said, collections aren't down much despite high unemployment because of increased unemployment benefits and Trump bucks. The increased unemployment benefits end in July/August, at which point I think you'll start to see some "pain". There is a disconnect between buyers and sellers right now because buyers think there should be lower prices due to COVID and changes in financing requirements but sellers don't think prices should be lower since their property performance (rents, etc.) has remained fairly stable. The disconnect is probably not as significant in single family but it is still there. Buyers are not motivated to sell right now and accept that their property is worth less than it was in February. Once their property has been on the market for six months and we get to September, I expect they'll think differently.


ItzMe1972
Member since Dec 2013
3622 posts

re: Should I cash out refinance my home, and use the money for an income property?
You have a good plan. Nobody can really tell you when is the best time to buy. Distressed sellers represent some of the best opportunities.

Only thing to consider is that if you hit hard times, you could have your own home repossessed.

You never get ahead by being overly cautious. Plan your work and work your plan. Go get a rental!


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AndyJ
Member since Jul 2008
1861 posts

re: Should I cash out refinance my home, and use the money for an income property?
Thanks for this. And thanks everyone for your input


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boogiewoogie1978
Arkansas Fan
Little Rock
Member since Aug 2012
10325 posts

re: Should I cash out refinance my home, and use the money for an income property?
It depends in the price for the property. Long term this downturn will cause people to continue renting due to uncertainty.


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Fat Bastard
Boston College Fan
Member since Mar 2009
47760 posts

re: Should I cash out refinance my home, and use the money for an income property?
quote:

My thought is: take out cash and refinance at a lower rate (have 9 years left but increase to 15.


yeah f that. not for that small percentage of equity. That is just what the bank wants you to do. Where is your flexibility in that? Like with a HELOC or LOC? You want more AMORTIZED interest (15 years now) or simple interest? with an accelerated payback plan you want simple.

get a second lien HELOC(should be easily doable on primary residence, some banks just do not like them on NOO, they prefer 1st liens on those) instead or a personal LOC. use that as DP if you do not have cash on hand now. That way you have flexibility/leverage with HELOC and can keep same terms and note now on main mortgage. Once you aggressively repay HELOC for the DP, you can use it to pay off primary residence using velocity banking principles. if you so wish. gives you options. Use simple interest debt to pay off a amortized interest debt with accelerated techniques. I am simply not paying anymore amortized interest than i already have to. I can use a HELOC or LOC and pay off one of my rentals using velocity banking and be done in 1.5 years saving myself over 35k in amortized interest. The simple interest i would pay does not even come close to the amortized interest for obvious reasons even with a higher simple interest rate.


quote:

no, not at all. but i'd have a couple should you want to draw on them for whatever reason. lines of credit give you great leverage and money you can access whereas you cannot access extra money spent paying down principal on a mortgage. If your goal is get mortgages paid off you surely do not want a cash out refi before paying it off or another mortgage once it is paid off to get your hands on some cash. velocity banking using a line of credit is a great strategy. Some lenders do not like second lien position HELOCS. they want first position aka property paid off on NOO rentals.


amortized versus simple interest

LINK

with the HELOC you can use over and over to make more purchases for DP's and aggressively keep paying back down. or finance flips. or do a cash buy and then cash out refi to pull your money back out. You cannot do that with your current strategy of one time cash out refi to pull out enough for a single DP. zero flexibility afterwards being locked in to 2 mortgages albeit nice leverage. what will you do for next property? will you have enough cash on hand then? What flexibility/leverage do you have now? to pull from repeatedly?

now if you feel a HELOC would take too long for you to pay off not making the simple interest worth it AND you intend to pay off primary mortgage soon that can be understandable. then by all means, Lock in your long term rate and roll with it. Whatever is comfortable for you. Especially if you do not plan on buying anymore anytime soon and do not need the flexibility of a HELOC or LOC.


good luck!
This post was edited on 5/14 at 12:58 pm


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Fat Bastard
Boston College Fan
Member since Mar 2009
47760 posts

re: Should I cash out refinance my home, and use the money for an income property?
quote:

I’d hold off on the rental.




depends on his financial situation and this economic climate. I am on the sidelines as far as buy N hold for now myself, because prices have went way up where i invest. That is good appreciation IF i wanted to sell, which i don't, and it is great for flips but not so much for BNH. However it does NOT mean he cannot find a good deal somehwere.


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