Low interest rates and rapid appreciation of the U.S. housing market has real estate owners with plenty of positive equity lately. The increase in equity equals an increase in net worth on paper. The best way to turn that unrealized gain into an actual gain is a cash out refinance.
Cashing Out
I consider the cash out refinance to be one of the best, if not the best, wealth building strategies. The low interest rate environment we find ourselves in, coupled with enormous money printing schemes (think inflation) makes cash out refinancing a power move.
To highlight this strategy, I will share a case study of my own personal experience using it: The first house I bought in 2014 appreciated over $100,000 since I bought it and I had paid down the principle by several thousands. I worked with a lender to refinance the mortgage on the property to the max LTV (loan-to-value). The new mortgage was more than I originally paid for the house, but the payment was not much more—the tenant payment still yielded positive cash flow for the property. However, the new mortgage amount minus what I owed on the property was about $75,000. They sent a check for that amount which I cashed, tax-free. I still own the property and it has shot up in value since I refinanced, leaving me with a lot of positive equity. I can repeat this process sooner rather than later.
Reinvesting
That is a good chunk of change for just owning something. Instead of just seeing a net worth increase on paper, I had $75,000 cash as a realized gain. I could have bought some nice things or blew the money, but I am an investor at heart, so I just ended up reinvesting the money. This is what makes the cash out refinance a power move. I took that money and reinvested into two bigger deals. A 136-unit apartment complex in Fort Worth, TX and a 272-unit apartment complex in Arlington, TX. Hopefully these properties cash out refinance in the next 2-3 years based on how quickly things are appreciating.
My primary residence that I purchased almost a year ago has appreciated over $100,000 so I plan on cashing out on it as well and investing the money into larger deals. The more I continue to cash out refinance my properties and reinvest the better chances I will have of beating inflation and becoming financially free. Real estate provides great cash flow and preserves equity. In addition, it appreciates in value over time, and you can deduct large amounts on your taxes.
Conclusion
I have had several friends sell their homes over the years and while I respect their decisions, I have advised each time to hold on to the property. The few that did listen are glad they did because they have enjoyed the appreciation. I think trying to hold on to property is the best way to acquire wealth over time. The important thing to note when cashing out is that you can still cover the debt service. That way if the market takes a downturn, you will be able to hold on to the property and see it through to the other side. If you can maintain positive cash flow, take out as much money as you can to reinvest.
