With interest rates at historic lows, lending readily available, and significant home price appreciation realized in Jacksonville over the last decade, JWB clients are taking advantage of an incredible opportunity called a cash-out refinance in order to accomplish their passive income goals more quickly. On a recent episode of the Not Your Average Investor Show, I broke down the cash-out refinance strategy and showed how JWB clients are able to buy additional rental properties without having to bring any additional cash to closing while reducing their interest rates on their existing mortgages.
What Is a Cash-out Refinance?
This is a type of refinance that takes advantage of the equity you’ve built and gives you cash while you take on a larger mortgage. You can then use that cash for things such as repairs or investing in additional rental properties while interest rates are low.
How Does It Work?
On the show, I used a real example of a current client named Adam who bought his first JWB property in 2011 for a purchase price of $80,600. Over the years, his home on the north side of Jacksonville has appreciated nicely and is currently appraised at $160,000.
Now, the bank is going to be comfortable lending up to 75% for this refinance to go through. That means the new loan will be for $120,000, with roughly $5,000 (at most) of that in origination and other lender fees. So now we’ve gone from $120,000 to $115,000 and we subtract the $50,000 current loan amount on his house. Here, we see principal paydown at its finest – Adam’s resident has been paying off his principal over the last ten years. Adam would be able to pull out about $65,000 by doing a cash-out refinance! Adam is being rewarded for making a great decision by buying and holding an asset that benefits from all five profit centers
A cash-out refinance is one of the best tools in today’s real estate environment to take a massive step forward in accomplishing your passive income goals.
What Are the Benefits Of a Cash-out Refinance?
1. You can pull out equity to acquire new assets at a lower rate.
Cash-out refinancing allows you to grow and diversify your rental property portfolio by using that equity to purchase additional
2. Lower interest rate
In our example, Adam’s original loan interest rate was 5%, but his new loan will be around 4%. That’s a phenomenal deal! Through an increase in the rent rates over the past 10 years, as well a reduction in the interest rate on Adam’s mortgage from 5% to 4%, Adam will still be able to earn positive cash flow on his rental property even though he has increased his loan balance up to $120,000. This is an incredible example of how to win in rental property investing when making decisions based on all five profit centers and holding on for a full real estate market cycle (at least 10-20 years).
3. You can take the fast track to accomplishing your passive income goals through rental properties.
Say, for example, your goal is to replace your $72,000/year income. That means you would need a monthly income of $6,000 to replace through rental properties in Jacksonville. When fully paid off, you can expect a JWB rental property to produce at least $800 per month in net cash flow. Therefore, you would need a minimum of eight rental properties in your portfolio to achieve this. In an environment where interest rates are at an all-time low and home prices are expected to appreciate more than normal over the next few years, you will earn a significantly higher return on investment by getting to that target number of eight properties in your portfolio sooner. A cash-out refinance allows you to do just that without having to bring additional capital to the closing table!
As investors, we now have the ability to finance our investment properties with interest rates that are under 4.5% for loans that stay in place for the next 30 years. The longer we keep these loans in place, the easier it is to pay them back as inflation drives up our income and revenue while debt payments on our properties stay flat. Many investors believe finding the right property at the right price is the greatest factor in generating wealth. However, understanding, acquiring and managing smart debt on assets will actually have a bigger impact on creating generational wealth. A cash-out refinance is one of the best tools in today’s real estate environment to take a massive step forward in accomplishing your passive income goals