Exciting News: Cash Out Refinance in Progress! (November 25, 2014)

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As readers may know, I’ve been trying to get money out of my rentals (unsuccessfully) for a little over a year now. I have quite a bit of equity built up into my Bay Area rentals, and have wanted to tap into it for the longest time…

One thing I failed to account for when I was loading up on rental properties is just how much more difficult I was making things for myself by taking on more loans. Getting a cash out refi using a big name bank is impossible once you surpass 4 loans (Fannie Mae guidelines)…

So, I’ve had to shop around a bit, talking to smaller banks and portfolio lenders. Due to my work schedule being as hectic as it is these days, I really just don’t have much free time during the day to make random phone calls. However, since we are now entering Thanksgiving holiday, things have slowed down a little bit and I finally found some free time this week to address this.

And I may have just found the perfect lender! They are willing to let me go as high as 75% loan-to-value (LTV), accept the fact that I’m carrying more than four mortgages, and aren’t requiring me to have to buy any points! Further, closing costs total only about $3,000 (accounting for everything), and I can get $1,200 back at closing.

After some debate, I decided to go ahead and start the process for Rental Property #2. Here are the details:

Purchase Price: $290,000
Projected Appraisal: $450,000
New Loan at 75% LTV: $337,500 at 4.375%; 30-year fixed
Outstanding Debt: $225,000

Cash Out: $112,500

After closing costs, I should be left with $110,700 to invest with.

My mortgage payment for Rental Property #2 will increase from $1,158.34 to $1,685.09 each month. The interest rate is the same as before — 30-year fixed at 4.375%.

So, if the refinance goes through, my cash flow will be reduced by $526.75 in the immediate term. With over $100,000 to invest with, I will need to figure out a way to deploy it to either:

A) Increase cash flow above $526.75/month.

B) Swing for the fences on future appreciation.

In a perfect world, I would be able to find a deal that can give me both cash flow today and appreciation tomorrow. Unfortunately, real estate prices keep on going up, so good deals have become really difficult to locate.

Readers, what would you do if you found yourself with $100,000 to invest with?

My initial thoughts are to look for a local Bay Area property that has great potential for short-term appreciation. If I can locate such a deal, I may elect to go with another 7/1 ARM to secure a lower interest rate. Then, look to flip it in 1-2 years… Of course, the markets may not cooperate, so of course I will need to find a property that is also suitable for long-term buy and hold.

Things are getting interesting again! 😉

 

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Jason LevyNo Nonsense LandlordDoneByFortyEven StevenJoshua Myers Recent comment authors
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JP
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JP

I have seen the same issues you faced with utilizing equity, but more because of DTI ratio. In 2013 I took out a HELOC on property 1 for 48k. Then this year I took a heloc on the same property for 120k and rolled in the old one. This is how I am buying property 3 next month. I am using 100k as a downpayment for property 3. I live in Boston and the market is almost untouchable. For that reason, we have been forced to think a little bit differently and focus on areas that are up and coming and have strong rental income. Unfortunately this will mean dealing with tenants that aren’t top notch. Prop 1 is getting a train station in 2017, prop 2 is getting a casino in 2017(which will at least increase rental income) and property 3 is in east boston which has been appreciating for some time now, but values are still low. With 100k in a booming market, we are able to profit $2k/month. Could you get the same return in an up and coming area around where you live?

Financial Samurai
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I dumped a couple hundred thousand in a venture debt fund for a 8-20% annual return.

Are you sure you want to take more debt? Why not just save up instead? How much is enough I guess is the real question.

Joshua Myers
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Joshua Myers

It seems like you’ve strayed from your original path over the past few months. You were investing in out of state properties for cash flow to fund your early retirement. Now you’re buying bay area properties for appreciation, speculating on Chinese internet stocks with negligible earning, and taking on 6-figures of addition debt without any plan for the funds.

At this point in the game you’ve won. All you have to do is avoid unnecessary risks that could potentially wipe you out. Remember the Warren Buffett quote, “Only when the tide goes out do you discover who’s been swimming naked.”

Financial Samurai
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This is a very good point. Be careful FIFIGHTER!

Just like how I predicted you wouldn’t be able to walk away from Corporate America, I predict you will get tired of managing so many properties as you age.

The best way to avoid the “If I knew then what I know now” response is to simply listen or ask those who’ve been there. I’ve been there. Trust me! Or not. The journey is always adventurous, regardless.

Sam

Even Steven
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Probably won’t like my answer, Pay off debt. Which goes against why you took out the money in the first place.

If I had 100K and my debt was paid off and I had an emergency fund that I felt comfortable with, I would look to create more cash flow, most likely with dividend stocks, I would consider real estate but I would not want to go into more debt so I would probably put it aside for now.

JP
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JP

Hi Even Steven, if you could protect yourself from being overleveraged in a down market and use the buy and hold strategy, why would you avoid additional debt? If the goal was to retire at the age of 65, I would say you can do extremely well without taking on ANY debt. But for most of us, we are planning on living a much different life at a very early age and stepping outside of the safety bubble a bit. I have a friend who makes over 500k a year between him and his wife’s salaries. They have 600k of cash in their account right now. His wife wants to stay at home with the kids, but his fear of debt keeps him from investing in something that could allow her to retire tomorrow.

Even Steven
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A big part of my early retirement plan is to have zero debt, this will increase the cash flow from my properties. Zero debt=More Cash Flow, we have chosen to pay off debt with rental investments and increase cash flow rather than invest in the stock market with this extra cash flow, it’s a debate sure, but it’s more a preference than an argument.

Increase cash flow is the FI Fighter, just depends which yellow brick road you like.

JP
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JP

I appreciate the response. I have read books, like “cash flow forever” that preach paying off all debt service and others like “real estate millionaire investor” that preach leverage. Both are probably fine, just depends on risk tolerance and personality. See you at the finish line!

JP

DoneByForty
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Another option might be to simply invest it into the market via index funds. It’s simple, quick, low cost…and if things go sideways you can pull out very quickly, unlike with a home purchase.

No Nonsense Landlord
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I may be tempted to go with a large apartment syndicated deal. Something where you put the cash down, and get a 10-12% return, and potentially more when they sell the building in 5-7 years.

Jason Levy
Guest

Check out realtyshares.com. returns are upwards of almost 20% in some cases and most properties seem to be in California. I’ve invested in a handful to date. As previous comments also stated you could just go for index funds or low cost/no fee mutual funds. Do you have kids or plan to have any? Front load a 529 Plan now! Lastly you could always be a private mortgage investor yourself. I dont think you’d have a problem getting 10-12% keep up the good work.

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