Should I cash out refi all 3 of my properties?

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Topic Author
wholeinone04
Posts: 254
Joined: Thu May 27, 2010 12:45 pm
Location: California

Should I cash out refi all 3 of my properties?

Post by wholeinone04 »

So I have 3 properties that have all seen some decent levels of appreciation and I'd like to cash out refi as much as possible. In general, my investing strategy is to buy, live in the property for a few years or more, then turn into a rental property and cash out refi periodically as the property appreciates. We're also looking to buy a nice house in LA in the next year and this will be very expensive so could use some extra cash for that :)

Here are the details on the 3 properties:

Property 1 - Mississippi
Mortgage
4.75% 30 year mortgage
Total payment - $967.08
$121,000 mortgage balance
$249k Zillow Value
75% LTV = $187k
Cash out refi = $66k
Rent
$1,255/mo after management fee
Lease expires 4/2022
COC = $288/mo or $3,456/year

I haven't shopped around for rates yet but I got one quote for a cash out refi for 4.5% 30 year and $3k in fees. This seems like a no brainer as long as the house can appraise for close to $249k since I'll be able to pull cash out and get a lower rate.

Property 2 - San Diego
Mortgage
2.875% ARM resets every september
Total payment - $1,310
$438 HOA, Total = $1,748
$178k mortgage balance
$552k Zillow Value
75% LTV = $414k
Cash out refi = $236k
Rent
$2,450/mo
Month to month
COC = $702 or $8,424/year

My rate is based off 2.25% + 1 year Libor so this could reset even lower in September. The COC is nice but I would rather have $236k right now than $8.4k (or less depending on expenses/etc) a year. Only issue is that a cash out refi would bring my rate way up to 4.5% so not sure what to do here.

Less concerned with earning monthly COC and as long as I'm about break even that is fine with me. In general, $1,000/mo or more in cash flow would be nice and be a meaningful amount but if it's at the cost of not being able to cash out $200k+, not so sure.

Property 3 - Los Angeles (Primary Residence)
(Likely moving out of this house at end of 2020 and converting to a rental property. And buying a new house)
Mortgage
2.75% 30 yr fixed
Total payment - $5,931/mo
$1.083 mil mortgage balance
$1.671 mil Zillow Value
75% LTV = $1.25 mil
Cash out refi = $170k

Not sure this one makes sense for a cash out refi since I have a good rate and it's my highest loan balance. And I can actually get lower with a 5/7 ARM no cost refi according to the same guy who quoted me for Property 1. So I think the strategy here may be to do a no cost 5/7 ARM refi and then take out a heloc?

Or I guess i could do a cash out refi and then a 5/7 arm no cost refi to get the rate down? I dont' think there are any rules against that although I wouldn't tell the first broker my plans :)
finite_difference
Posts: 2510
Joined: Thu Jul 09, 2015 7:00 pm

Re: Should I cash out refi all 3 of my properties?

Post by finite_difference »

What would I do? Sell all rental properties and buy VTSAX.

What are you doing with the cash from the cash out refi? Buy more properties? Buy BTC? Property prices are pretty high right now.

Heavily over-leveraging might work great until it doesn’t work (recession, housing bubble collapse, etc.)

I think you could get more useful feedback if you explained your overall strategy. And also if you are doing this as your full-time job, or you have another job and this is your side business, etc.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
dstac
Posts: 120
Joined: Sun Jun 02, 2013 5:12 pm

Re: Should I cash out refi all 3 of my properties?

Post by dstac »

I’m confused by your numbers. Is the only expense the mortgage? No repairs, utilities, vacancies, etc. Your mortgage payments as a % of income will end up being pretty high. That said...
1) sure, do it. Lower new rate means minimal impact to payments. Find a no fee option since you expect to do this again soonish.

2) Looks like speculation on the rate. If you need cash, do a cash out with a high rate; then 6mos from that closing do a clean refi to drop the rate.

3) Going to a payment of $7k on a sf rental seems like a stretch, but you’ll know the rental market better. If you do cash out, I’d think about another 6mos clean refi while still owner occupied. You likely won’t see these rates this low on this property again. Alternatively, maybe sell this one to finance your purchase and take advantage of the owner occupied exclusion to get your gains tax free.
Topic Author
wholeinone04
Posts: 254
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: Should I cash out refi all 3 of my properties?

Post by wholeinone04 »

finite_difference wrote: Sat May 01, 2021 10:37 pm What are you doing with the cash from the cash out refi? Buy more properties? Buy BTC? Property prices are pretty high right now.
Good question. So the money will mainly go to buy our next house. But I'm also open to the idea of just cashing out for the sake of cashing out and getting/having the money. Yes RE prices are high (and inventory is super low, especially here in LA) but not much we can do, currently in a 1800 sq ft 3 br house and want 2500-3k sq ft 4/5 br (just had second kid and will likely have third in 2-3 years). And need good school district as I want to send my kids to public school (current one is bad, which is crazy for a million dollar neighborhood i know lol). We're also looking at very nice neighborhoods in HCOL area which typically appreciate better and hold up better in a recession/down housing market (pandemic is a good ex, everyone at the top got way richer).
finite_difference wrote: Sat May 01, 2021 10:37 pm I think you could get more useful feedback if you explained your overall strategy. And also if you are doing this as your full-time job, or you have another job and this is your side business, etc.
Sure. About 60% of our NW is already in the market (low cost funds - nothing special, doing well). 37% or so is in real estate (equity in my 3 properties + some private real estate funds). Don't like to keep much cash on hand so usually shoot for $50-100k cash. Have a pretty stable business income of $350k/year and wife is starting a new job at end of year, $220k/year w2. Also have some other high risk/hard to value type assets (like my business) but I don't include those in my 'liquid Net Worth'.

My MS property is 100% passive, I have managed the SD condo for last 8 years, takes no time, long term tenants only. Will pass it over to PM if it ever takes more than 1 hour/quarter. Will convert current property to a rental when we buy our new house. Will likely manage it myself but as mentioned, have plenty of experience and am good at being a PM.
finite_difference wrote: Sat May 01, 2021 10:37 pm Heavily over-leveraging might work great until it doesn’t work (recession, housing bubble collapse, etc.)
Yep obviously positives and negatives to leverage. If I cash out refi though, I'm required to keep 75% LTV so that's a 4:1 leverage margin, is that over-leveraging in your book? I don't think it is. If housing market crashes more than 25% and I go under water, that won't change my monthly payment/rental income (significantly I'd guess - not sure tbh).

I think we're all investing in stocks and RE though because we are reasonably sure it's going up and to the right. The rate of increase can be debated but if I'm borrowing in the 2-5% range and appreciating by 3-10% x 4 (4:1 leverage) - I'm potentially returning 12-40% per year.
Topic Author
wholeinone04
Posts: 254
Joined: Thu May 27, 2010 12:45 pm
Location: California

Re: Should I cash out refi all 3 of my properties?

Post by wholeinone04 »

dstac wrote: Sat May 01, 2021 11:21 pm I’m confused by your numbers. Is the only expense the mortgage? No repairs, utilities, vacancies, etc. Your mortgage payments as a % of income will end up being pretty high.
I simplified it for this post and only included mortgage, prop tax, ins and hoa below. But yes you would need to add in repairs, utilities, vacancies etc. For the MS house, they're probably about average but for my SD condo, they're much lower because it's a newer condo, I go for longer term tenants/less hassle, etc. But that's sort of my point, the monthly cash flow from the first two rental properties (and likely our primary residence when we convert to a rental) is nominal relative to our income/other investments (see post above). So whether I'm +$750/mo or even -$750/mo, it really doesn't matter much to me since I'm appreciating at potentially 4:1 margin so that appreciation should eclipse any monthly +/- cash flow.

Ex: for my SD condo, let's assume super conservatively that I had COC return of $500/mo for last 8 years of renting = $48k. Meanwhile, this thing has appreciated from $280k to $552k! So the delta there eclipses my $48k in rental income.
dstac wrote: Sat May 01, 2021 11:21 pm 1) sure, do it. Lower new rate means minimal impact to payments. Find a no fee option since you expect to do this again soonish.

2) Looks like speculation on the rate. If you need cash, do a cash out with a high rate; then 6mos from that closing do a clean refi to drop the rate.

3) Going to a payment of $7k on a sf rental seems like a stretch, but you’ll know the rental market better. If you do cash out, I’d think about another 6mos clean refi while still owner occupied. You likely won’t see these rates this low on this property again. Alternatively, maybe sell this one to finance your purchase and take advantage of the owner occupied exclusion to get your gains tax free.
1. Why would I want no fee cash out refi here? This one is the slowest appreciating (in MS) so I imagine it will be at least 5-10 years before I could do another cash out refi.

2. Yea I am kind of surprised you're allowed to do a cash out with high rate and then just a clean refi to drop the rate. I've done a lot of refi's so getting all the docs/etc is painless and under no time crunch :)

3. Fair. I need to dig into rental market a bit more but $6-7k for our house should be pretty doable. Similar house rented a year or even two ago down the street for $6k (not as nice/big) pretty quickly I believe.

I think this is another point though for not cash out refi'ing this one as we've only lived here a few years so the rental price vs mortgage/expenses is still a little too tight. There will definitely be some real expenses on this house even though it's newer so the smart move may be to get the rate down as low as possible and go more for COC return for now on this property. And once we've built up way more equity ($3-400k), then go for a cash out refi. Any thoughts on the HELOC?

Although, if we wanted to be more aggressive, we could do another cash out refi + 6 mos later, regular refi to get rate down as you mention.
dstac
Posts: 120
Joined: Sun Jun 02, 2013 5:12 pm

Re: Should I cash out refi all 3 of my properties?

Post by dstac »

wholeinone04 wrote: Sat May 01, 2021 11:44 pm
dstac wrote: Sat May 01, 2021 11:21 pm I’m confused by your numbers. Is the only expense the mortgage? No repairs, utilities, vacancies, etc. Your mortgage payments as a % of income will end up being pretty high.
I simplified it for this post and only included mortgage, prop tax, ins and hoa below. But yes you would need to add in repairs, utilities, vacancies etc. For the MS house, they're probably about average but for my SD condo, they're much lower because it's a newer condo, I go for longer term tenants/less hassle, etc. But that's sort of my point, the monthly cash flow from the first two rental properties (and likely our primary residence when we convert to a rental) is nominal relative to our income/other investments (see post above). So whether I'm +$750/mo or even -$750/mo, it really doesn't matter much to me since I'm appreciating at potentially 4:1 margin so that appreciation should eclipse any monthly +/- cash flow.

Ex: for my SD condo, let's assume super conservatively that I had COC return of $500/mo for last 8 years of renting = $48k. Meanwhile, this thing has appreciated from $280k to $552k! So the delta there eclipses my $48k in rental income.
dstac wrote: Sat May 01, 2021 11:21 pm 1) sure, do it. Lower new rate means minimal impact to payments. Find a no fee option since you expect to do this again soonish.

2) Looks like speculation on the rate. If you need cash, do a cash out with a high rate; then 6mos from that closing do a clean refi to drop the rate.

3) Going to a payment of $7k on a sf rental seems like a stretch, but you’ll know the rental market better. If you do cash out, I’d think about another 6mos clean refi while still owner occupied. You likely won’t see these rates this low on this property again. Alternatively, maybe sell this one to finance your purchase and take advantage of the owner occupied exclusion to get your gains tax free.
1. Why would I want no fee cash out refi here? This one is the slowest appreciating (in MS) so I imagine it will be at least 5-10 years before I could do another cash out refi.

2. Yea I am kind of surprised you're allowed to do a cash out with high rate and then just a clean refi to drop the rate. I've done a lot of refi's so getting all the docs/etc is painless and under no time crunch :)

3. Fair. I need to dig into rental market a bit more but $6-7k for our house should be pretty doable. Similar house rented a year or even two ago down the street for $6k (not as nice/big) pretty quickly I believe.

I think this is another point though for not cash out refi'ing this one as we've only lived here a few years so the rental price vs mortgage/expenses is still a little too tight. There will definitely be some real expenses on this house even though it's newer so the smart move may be to get the rate down as low as possible and go more for COC return for now on this property. And once we've built up way more equity ($3-400k), then go for a cash out refi. Any thoughts on the HELOC?

Although, if we wanted to be more aggressive, we could do another cash out refi + 6 mos later, regular refi to get rate down as you mention.
A couple reasons for the no fee path:
1) you're chewing up a lot of equity in fees that you can't get back. (almost 5% of cash out #1 will be in fees) You are on bogleheads, the land of low fees.
2) If you are planning on refis or sales, you'll end up paying for marginal difference in rates that you may never come out ahead on. Rather than playing catch-up for 7 years, why not just start ahead and lose your lead over those 7 years without worrying about how much you spent on a refi. I think this may also put you in a better head space to refi again if needed/desired. This cash is clearly more valuable to you now rather than saving a little each month.

There's a whole bunch on the mortgage refi mega-thread talking about this.

Regarding the HELOC, sure go for it. If you need to refi the HELOC into a primary, it will likely be viewed as a cashout though so be prepared to pay higher rates. Of note though, most HELOCs don't have great fixed long term rates so depending on your payoff plans...

tbh This all looks like you are speculating on increasing property values. I'm with you on expecting values to continue to rise, I'm not will to take on your level of risk concentrated in the southern CA residential home market. If rents drop by 5-10% are you going to be comfortable with the situation? (I bought a property in 2007 that took until 2018 to return to its purchase price.)
runningshoes
Posts: 8
Joined: Thu Apr 08, 2021 3:48 pm

Re: Should I cash out refi all 3 of my properties?

Post by runningshoes »

I'm looking at 2 different issues based on your posts;

1. You're looking to buy in the LA area in a year or so and you plan on keeping your current home to rent out.
2. The rent / house value on both rentals are what I would consider low.

Given that you'll need cash for the new home, I'd hold on to the properties for another 6 months and then simply sell both rentals. The current place you're living in should be evaluated for both the rent you think you could get and expected future appreciation. If you think the appreciation will continue, the rent becomes less relevant given the leverage you have. If not, you're probably better off selling that as well given the increases over the last year or so and putting any extra cash into a combination of the new place and the market.

My opinion is based off the current run in both real estate and the stock market - both are over done and either unlikely to continue or maybe we see a correction. Now is a good time to be a seller, especially if you could use the cash for other investments.
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