Cash Out Refinance Complete! (January 09, 2015)

Done! My cash out refi on Rental Property #2 finally got completed today. I signed off on all the docs, so funds should be wired into my account on Monday.

After all is said and done, I will have a new loan of $330,000 at the same 4.375% fixed 30 year rate. Monthly mortgage payments for Rental Property #2 will now be $1,647.64. The account is escrowed, so taxes and insurance of $315.00 are included on there. Total monthly dues will be $1,962.64. Since I am currently renting out the property for only $2,150, I will most definitely need to raise rents to offset the new mortgage increase. I’m going to attempt raising rents to $2,350, which is still plenty fair and below market. I have a wonderful tenant and think this would be reasonable for both parties. Otherwise, I will list it on the marketplace for $2,500.

An interesting twist that developed is that the lender I’m working with wasn’t able to pass my original file through underwriting. Once you have more than four mortgages, it becomes a pretty daunting task… Unless you are using a portfolio lender, Fannie/Freddie will limit your ability to execute a cash out refi on an investment property when you have more than four loans…

Since I really wanted to go through with this refi, I did what I had to do… I used a portion of the cash out refi proceeds to payoff Rental Property #4’s loan… The lender was willing to do this, so I now own my very first property FREE AND CLEAR! 🙂

After paying off Rental Property #4’s loan, the old loan on Rental Property #2, and all taxes/fees/closing costs, I was able to get back $35,264.84 in cash.

And I’ll take that deal any day of the week!

As is often expressed, real estate is simply a game of shuffling money around. When you think about it, I closed on Rental Property #2 by putting in $58,000 of my own capital. I originally purchased it for $290,000 with 20% downpayment.

Now, by pulling out ~$35,000, my original investment capital has been returned back to me (if you count the $64,025.71 used to pay off Rental Property #4, then ~$100,000 in total has been returned back to me). So, not only do I get my initial investment capital back out, but I STILL own and control Rental Property #2. Thanks to some substantial appreciation in the Bay Area, even with the refi, I still have 25% equity, or $110,000 tied up into Rental Property #2 (It appraised at $440,000 and the loan is 75% LTV). So, it would take a severe market crash for me to go underwater with this property…

It can be argued that a cash out refi is adding more risk (debt), but I would argue otherwise… Actually, I’m making my life somewhat simpler because now I only have 4 loans! Plus, now that I’m back down to 4 loans, I can attempt a cash out refi on Rental Property #1 to pull even more of my original investment capital on that property back out as well.

I realize another recession or market crash can always happen… and who knows, maybe it’s even around the corner? But it’s not like I’m pulling out $100,000+ in funds to splurge on a Ferrari or Lamborghini…

Which scenario makes more sense?

  • Your property appreciates $150,000 and you do nothing… The appreciation is all paper gains, in that case. If there is a market crash, you could lose all those gains on the way down. In essence, you rode the rollercoaster ride but have nothing to show for it. No capital gains, no additional assets purchased, nothing.
  • Your property appreciates $150,000 and you do a cash out refi. You pull out all of your original investment capital and more. But you still keep and control the original asset. You aren’t selling the golden goose or anything… But now, you’re playing with the house’s money. You then raise rents to offset the new mortgage payment. With the funds back out, you can put your original investment capital back into dividend growth stocks (buy more assets!). You then stash the remainder in cash. If there is an ensuing market crash, you are now sitting in a very strong cash position and can react to snatch up any bargains (buy even more assets!).

Appreciation is nice and I’m a big fan of it… Unfortunately, without action, it’s just paper gains that doesn’t do anything but sit there… It’s like stagnant money under your mattress.

I want to declare early FI and leave my corporate job behind sometime this year… And as we all know, it takes a lot of assets to secure one’s financial freedom.

Again, the best way that I know of to mitigate risk is to be in a cash strong position. If I can pull out another $100,000 from Rental Property #1, I will do that!

With a ton of cash in the bank, I can then sit tight and wait for the next buying opportunity. It can be in index funds, dividend growth stocks, or anything… but probably no more property! Most importantly, I will be able to mitigate risks and weather any potential storms. If you’re going to take on a lot of debt and play with a house of cards, then you had better brace it with a boatload of cash! You never want to experience the potency of leverage in that other, fatal direction…

Now that we’ve got this one out of the way, I’m going to start immediately on the next cash out refi!

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Back in the Bay Area (March 21, 2017)Real Estate Investing: Principal Paydown (The Most Unappreciated Pillar)Converting Net Worth into Cash FlowCash Out Refinance Complete! (February 06, 2015)Kathy @ Rental Realities Recent comment authors
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Retire Before Dad
Guest

FIF,
Love it! Great execution, and it must be exciting to own one of your properties free and clear. Congratulations. I’m considering something similar in the future with my one rental property because it’s tying up a lot of cash. Nice to see an example of how to unlock some capital.
-RBD

Leigh
Guest

Congrats on owning one of your properties in full! I don’t think that was in your plan, but it seems pretty cool! I can’t wait to own mine in full. Soon… Since Rental Property #4 no longer has a mortgage, does that mean that this doesn’t really affect your overall cash flow that much?

No Nonsense Landlord
Guest

Mitigating risk by pulling money out is not always mitigating risk… Unless you can get a better return on the money you pull out. Higher payments are also more risk. And you paid fees, which came out of your equity, to do it.

You are also probably getting to the point where you cannot pay all of the mortgages on your job alone, you are dependent on the rent.

Donald Trump was able to do this successfully, but he had to declare bankruptcy a few times to do it. Keep focused, continue to get a better cash flow, and do not always swing for the fences.

JP
Guest
JP

Congrats on the refi! Scenario 2 wins for early FI folks. Scenario 1 might work for someone who enjoys their work and is in it for the long haul, they can ride the roller coaster and pull out at a good time. I have 2 refis planned for 2015, both just to lower rates and payment. A hidden bonus is that if you time the refi right, you can skip a payment or two without penalty. With my high mortgage payments, it’s worth it for that reason alone.

Andre Monk Book
Guest

Congrat! Property business is great!

M
Guest

Congratulations on getting what looks like a pretty sweet refi there my man. I only wish the property market was not so crazy in the UK right now, or else I’d have much more seriously considered investing in a rental property.

Cheers

Tawcan
Guest

That’s awesome that you now own one of your properties in full. Great stuff on he refinance.

James
Guest

Niice!

Did I miss what you intend to do with the remaining $35k? Are you looking to accumulate another property, or is my reading comprehension lacking this evening for some reason and I just missed it?

Kathy @ Rental Realities
Guest

Well done! We’re hoping to do something like this on a property in a year or two. Still waiting for the numbers to work out so that I can pull money from the property, but the increased rent will give us cash flow numbers that are somewhat similar to the cash flow we experienced when we purchased the property. We have a long-term great tenant, so the final straw will probably be when they move out someday and I get the unit to market rent.

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