House Hacking: Best of Both Worlds with Cash-Out Refi

Cash-out refinancing is a method used to access the equity in your property. Today we are going to talk about how this strategy can be applied to the investment scenarios mentioned earlier.

What is a cash out refinance?

A cash-out refinance is a mortgage option where you borrow more than what you owe on your current loan and receive the excess funds in cash. It allows you to tap into your home's equity for various purposes by replacing your existing loan with a new one.

We'll use the examples we've been talking about over the past few weeks on our 10, 20 and 30 year time frames.

Scenario 1: 10-Year Investment

After 10 years, you have accumulated equity of about $92,000. 

By refinancing, you can obtain a new loan based on the increased value of the property and to capture that equity you've gained over those 10 years. 

For example, our 200k property appreciated to 244k after 10 years. The remaining loan balance is approximately $152,000, which is where we get our 92k in equity. 

You could refinance and take out a loan for a percentage of that 244k value, which is what is called LTV or loan to value. Typically this is 75% or 80% of the value. 

So, you could refinance your original mortgage, which was the owner-occupied financing option (200k with 5% down at 6.5% interest over 30 years). When you do this, it pays off the original mortgage and replaces it with this new one. 

let's say you refinance with an 80% loan to value. Your new loan will be 80% of the new price (244k)

Meaning your down payment will be 20% of that 244k value. This comes out to around $49,000, and your new loan balance is now about 195k.

This is where the cash-out refinance comes in. We have 92k in equity but only $49,000 of that is going towards the new "down payment" on that mortgage - which is $43,000.

that remaining equity is yours to keep! And again, you guessed it - it's tax free!   

So in a perfect world, if you did this for all of your 5 house hack properties after their 10 year time frames, and you can cash-out refinance keep 49k in each property and receive a tax free check of $43,000 per year from the refinance!

Fun facts: Those 5 properties accumulated to $50,000 in down payments to purchase.

If you refinance just one of those properties, you just got your initial down payment back on 4 of those!

If you cash out refinance on all 5 of those properties, you still own all of them AND collected around $215,000 from the cash out, that's a ROI of 330%. And this is just on the 215,000 you physically received, not including the full equity amount or return on equity.

Be doing this, and repeating the process over and over buying more properties with the cash-out money, in theory you're pretty much getting an infinite return on your money. Your investment is giving you a return.. which then gives you a return.. and keeps going. After you've recouped your initial investment, the returns can be infinite. 

Scenario 2: 20-Year Investment

After 20 years, your equity in each property is around $220,000. Our property value increased to around $298,000 and obtain a new loan based on a percentage of that value.

If we cashout refinance at 80% LTV, about $60,000 will go towards equity of the new loan, and the remaining equity of $238,000 is yours to keep. Tax free.

if you cashout refi on all 5 properties after their 20 year time frames, you STILL own all 5 properties and collected $238,000 per property for the next 5 years. A little under $1.2million TOTAL.

Each refi will give you an ROI just shy of 2,300%.. 

Scenario 3: 30-Year Investment

The accumulated equity of around $363,000. if you cash-out refinanced on these properties, with 80% LTV your equity/down payment needed would be around $73,000. meaning you could cash out around $290,000 per property for the next 5 years, and continue to hold them as investment properties.

Now, as you know you can refinance a property with a mortgage, but you may not know that you can still put a mortgage on a property you own free and clear.

Things to consider when deciding to cash out refi or not:

The value of your home - remember, I'm keeping these numbers simple for explanation purposes. It's important you do your due diligence on the market prices and what your home can appraise for when the bank goes out to find the value of your property, which leads me to #2

Your equity in your home - this method only works when you have the equity to do the refi or have enough equity to meet the 20% down or 80% LTV threshold. I've learned over the years, equity doesn't really mean anything unless you use it (to buy, sell, refinance, etc)

current interest rates - While these numbers are AMAZING, again, do your due diligence on where market rates are. If you're looking for cash flow and the numbers don't make sense with a refinance, maybe wait another year and build more equity. Or visa versa, maybe rates are lower than your current rate in year 9, it might make more sense to do it sooner.

Lastly, what to do with your cash-out funds - It depends on your goals. Are you retiring early? Are you re-investing these funds into other investments? Or, are you using these funds to purchase a car, boat, that new jet ski? It's totally up to you and your financial standing at that time. 

But you know me, I recommend turning around and buying more investment properties to catapult your wealth for the long term. If you do this, you can do all of the above later on while setting you and your family up for generations to come :)