Cash Out Refi Now for the Inevitable Market Downturn
A big part of being successful in real estate investing means understanding the ins and outs of the market. Being a seasoned and effective investor goes far beyond simply buying and selling property; there’s a lot more to know, from which improvements generate the highest ROI to how long to wait to make a purchase when the market isn’t quite right. Another major strategy that can differentiate amateur investors from seasoned pros? Knowing how and when to utilize a cash out refinance when the market is poised to take a dip. If you’re looking for a way to grow your portfolio and increase the cash you have available to purchase property in the future, taking cash out may be the perfect way to position you for future success.
Cash Out Refinance Loans are perfect for borrowers who need cash very quickly and either cannot wait 30-60 days for conventional financing or do not qualify for conventional financing.
Who Would Benefit from a Cash Out Refinance Loan?
- A homeowner who needs to consolidate debt to reduce monthly payments
- A homeowner who wants to take cash out of their property to invest in other high-yield savings investments.
- A homeowner who wants to become a real estate investor by taking equity out of their primary residence to buy an investment property.
- A real estate investor who needs quick access to cash to pay for a new investment property.
- A real estate investor who already has 8 properties financed by Fannie/Freddie and wants to finance additional properties with Fannie/Freddie.
- A small business owner who needs to take cash out of a property for business purposes.
Types of Cash Out Refinance Loans
Lending against your primary residence is generally considered a “consumer purpose” loan, but there are some exceptions. Consumer purpose loans are generally credit-based loans that require full income and asset documentation but have lower interest rates and fees. The first two examples above would be considered consumer-purpose loans.
Investing in real estate and other business ventures is generally considered a “business purpose” loan, regardless of the collateral used. Business purpose loans are generally asset-based loans that require minimal documentation and have higher interest rates and fees. Examples two through six above would be considered business-purpose loans.
How a Cash Out Refinance Loan Can Help You
If you have other debt, a cash out refinance can provide an easy way to extract cash from real estate equity to pay off other lenders. If you have high-interest forms of debt – or debt at higher interest rates than a typical home mortgage loan – a cash out refinance can effectively serve as low-cost consolidation.
Some forms of loans are relatively high risk, or extremely expensive. A cash out refinance tends to have similar associated costs as any other refinance loan, so it’s far more affordable than taking out a personal loan without collateral or utilizing a costlier lending program like payday loans for the sake of securing cash.
The Right Time for a Cash Out Refinance
Extra cash is commonly used to pay off debts or cover the costs of renovations. However, there’s another time that can be ideal for a cash out refinance: when interest rates are low and housing prices are high. When this is the case (like now), taking cash out can allow you to park it in a safe place to grow while you wait for market conditions to stabilize. This way, you can moderately extend the face value of your loan while you wait out the higher home prices. Then, when prices drop, and things normalize, you can use that cash to purchase more property.
Wondering why it’s not prudent to wait until prices drop to borrow cash? Loan-to-value, or LTV, ratio may prevent this. As the value of your asset decreases, you may find yourself facing a much a smaller – or nonexistent – cash out opportunity. Your LTV may be too high, not allowing you to get cash out from your home.
Why Now Is the Perfect Time to Refinance
If you’re considering refinancing for cash, now is the perfect time. While California real estate prices have been increasing steadily for several years, it appears that property values may be dropping in the near future, leading to lower prices. As such, taking a cash out loan will be more difficult in the future.
Prices in the major markets in California, like Los Angeles, are showing signs of upcoming decreases, implying that there may be a time in the near future in which prices will begin to drop lower. Prices are not expected to have 2008 style drops, but we can expect lower prices in many areas. Home buying has also slowed in the area, with purchases falling below the 400,000 level in September 2018, indicating a softer home purchase market.
By extracting cash from your home’s equity and putting it away in a high yield savings account, money market account, or in U.S. bonds, you can let your cash work for you, growing steadily until you’re ready to make a purchase. You can also put your money in high-dividend paying stocks or into the market. However, while the potential for growth is higher, the potential for loss is higher, too. You will be paying interest on investments that have gone down in value.
Risks vs. Rewards in Real Estate Investing
Successful real estate investing is often about taking calculated risks, and one of the most effective risks you can take is a cash out refinance at the right time. With the ability to moderately increase your loan when interest rates are low for the benefit of excess cash to invest when prices drop, you open the door to significant future potential.
By taking action now, you can be ready for what’s to come, increasing your flexibility and the buying power you have available to ensure that your next property purchase goes off without a hitch. After all, having available cash to buy at the right time is an important key to success.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574-LOAN or by visiting westparkloans.com.