Cash Out Refinance
Well, it’s Sunday again so it’s time for another blog post. I wanted to add a little bit of education to the blog that may be helpful for some of you who are getting into real estate investing and even some more advanced investors. Having just completed another cash out refinance on a rental house, I figured this would be a great topic to cover with some real world numbers so you can see exactly what I’m doing. These two stories include exact numbers from my last two deals.
I wanted to post the story of a rental house that we purchased a few months ago and just got done with a cash out refinance. The numbers are great and I think they will give some of you the motivation needed to pull the trigger on a similar property.
House is a 4/3 in a gated community. It was a HUD foreclosure and the previous model home in a community that is still building new construction homes. The area is dominated by military, health care, and some executive rentals.
The purchase price was $185k and we put just under $5k into the home for closing costs and light renovations (paint, cleaning, gutters, fridge). Cash purchase all in at $190k.
We rented the house out immediately on a long term lease at $1775/month with the tenant responsible for all utilities and lawn maintenance. So, this house was just under the 1% rule which is what I shoot for in my upscale rental properties. However, the rent will increase 3% per year so we will get there in about 2 years.
I contacted my online lender after 2 months of purchase and got the cash out process going, the house appraised at $265k and at 70% LTV I was able to pull out $185,500 on my cash out with no origination fee, 4.5% APR, 30 year am, and $1k lender credit at closing.
So, we now have about $5,500 into the house (due to closing costs on the refi) and it is cash flowing at just over $300/month once maintenance, capex and vacancies are included. I currently self manage our properties but that would drop the cash flow in the future when they all get passed over to PM.
I did need the upfront cash and had to find the deal but for a little bit out of pocket we were able to add a great cash flowing property to our inventory. And, the day after closing we bought another one with the cash!
I wanted to take a few minutes to write a post about my most recent cash out refinance success story. This post will be two fold, first it will hopefully motivate others to get into buying rentals and refinancing. Secondly, it will give a big shout out and thank you to the fantastic lender I found on Bigger Pockets that made it all possible, Jerry Padilla with MB Financial.
Here are the numbers:
This house is a 5 bedroom, 3 bathroom SFR in a great neighborhood. It was brand new construction, the first time I have done that… I bought it for $240k and as the buyers agent, I used my commission to reduce the price to under $235k. I did a few upgrades (countertops and appliances) and was into the house for $240k when it was all said and done.
I rented the house out quickly at $2,100/month
The appraisal and LTV is where Jerry was most incredible in this transaction. The house initially appraised at $250k but on Jerry’s recommendation I sent the appraiser more realistic comps and some of the upgrades that were done. The appraisal was then adjusted to $285k. I already have quite a few loans on my other rentals so I was expecting to be limited to 70% LTV in accordance with the delayed financing exemption rules. However, the closing happened just over 6 months after purchase and Jerry was able to get me a loan at 75% LTV. So, I was expecting $175k cash back but with these two changes Jerry helped make possible I was able to pull out nearly $210k.
That is $35k that went STRAIGHT BACK INTO MY POCKET! For most of us, that is another house…
So, when it was all said and done I left $25k into the property, added $50k to my net worth in equity, and am making a 15% COC return and 25% return when including principal pay down. I am happy with those numbers.
I have worked with a lot of lenders since I got into real estate in 2009, but Jerry was fantastic. I will use him again for sure and if anyone is on the fence, do it. Jerry, thank you and I can’t wait to do another one of these soon.
The best part about this is, I already have the next one under contract and it is set to close soon! I reserve this cash to try and add 2-3 rental houses to my portfolio each year. The goal is long term cash flow and wealth building by adding instant equity to my balance sheet.
If you are looking for deeply discounted, OFF MARKET properties in the Pensacola, Pace, Milton, Navarre, Gulf Breeze or along the Gulf Coast, sign up for my email list and be the first one to see them. Get your cash together and start adding some zeros to your net worth, I’d love to help!