Exciting news this past week! I finished signing this past Friday, and am one step closer to closing out a cash out refi on Rental Property #1! Once funding is finalized next week (fingers crossed), I will be one GIANT step closer to early FI and pretirement! 🙂
As readers may be aware, I completed a cash out refi on Rental Property #2 last month. By doing so, I was able to pay off Rental Property #4 (I now own that property FREE and CLEAR!), and acquire another Bay Area rental property.
This time around, the deal was even better! The lender that I’m working with is pretty aggressive (they claim to want to take over the lending industry)… That, and they wanted to do me a favor since I was a repeat customer, so they were more than willing to give me favorable terms on this latest cash out refi.
As a result, I was able to cash out refi into the exact same 30 year fixed mortgage at 3.75% interest that I had previously secured on Rental Property #1 back in 2012! The best part? They waived the point associated with this lower rate, which saved me over $3,000!
The property appraised at $435,000, and the lender was again willing to give me 75% loan-to-value (LTV). Here are the terms of the new loan:
New Loan: $326,250
Money Back Out: $94,289.89
Principal and Interest: $1,510.91/month
Total Payment: $1,931.42/month
My current principal and interest payment is $1,094.11/month. If we perform some basic elementary math, I can see that my monthly mortgage payment will shoot up another $416.80/month. This comes out to be $5,001.60 each year in additional mortgage payments.
So, to make this deal worthwhile, I will need to earn a return of 5.30% ($5,001.60/$94,289.89) each year. In actuality, I will need to earn a return LESS than 5.30% because the money I’m receiving back out is actually LESS than it should be because a portion of the proceeds were used to pay off the second installment of property taxes (~$2,400) and to make an initial deposit into escrow…
Regardless, beating a 5.30% return shouldn’t be too bad at all… If I simply put all the funds into dividend growth stocks yielding 4.0%, I would already receive back $3,771 in dividends alone the first year! My plans are also to raise rents on Rental Property #1 to at least $2,300/month (from $2,130/month). This would contribute another $2,040 to the yearly income, which would easily put me over the $5,001.60 target set above…
Of course, I realize that leverage is not without risk… But as a financial freedom fighter looking to build my passive income stream for the long haul, I greatly appreciate the need to stack up as many assets as possible. Having ~$100,000 in new ammo to invest with will make me feel like a kid in a candy store!
Ultimately, I never would have done what I did if I didn’t believe in my own abilities to intelligently re-invest that capital. What can I say? I have extremely strong conviction that dividend growth investing is a viable way to build sustainable passive income for decades to come. If I buy right, the combination of: appreciation, dividend yield, and dividend growth should create a total return that easily surpasses 5.30% throughout the years.
When it comes to financial freedom, I’m a huge fan of both real estate investing and dividend growth stocks. I see the merits of both, and this move here clearly demonstrates how an investor can utilize both strategies to synergistically enhance their overall portfolio. I rode the appreciation wave up with leveraged rental properties, and now I’m taking out the profits to invest in something more liquid and a whole lot more passive. But I’m still holding on to my properties in the process!!
Also, I should add that another strong motivation for this cash out refi was to have additional cash reserves on hand for emergencies… Most likely, I won’t dump all the funds into dividend growth stocks, but will also set aside a huge chunk for rainy days. As I mentioned before, I have not yet quit my corporate engineering job, and will most likely return back to work in the near future to stash more cash. With this move, I feel confident that I will be able to get to ~$200,000 combined in cash, dividend stocks, and emergency fund prior to exiting out of the rat race. This would do absolute wonders for peace of mind, moving forward into early FI/pretirement.
I believe this move is a step in the right direction for me… Hopefully, everything goes smoothly and funding will be completed sometime next week!