Earlier, I wrote about how I went from Equity appreciation (Phoenix) 12 years ago, to Cash-flow (Midwest) 5-6 years ago. Now, my strategy has evolved into a combination of both. I did my first cash-out refinance this year and I did it into my LLC. With a cash-out refinance strategy, instead of selling, I am now able to use the equity appreciation to get cash to acquire more rentals.
I was over-leveraged on the second one that I bought in Phoenix, so I couldn’t have done cash-out 3 years later. That second one in Phoenix now has a valuation of $500k Zestimate, and the first one is now worth about $300k Zestimate.
The only issue with doing cash-out in Phoenix at $500k is whether the new mortgage would have been covered by rent, in which case you might be better off selling it if you feel the market is at a peak.
There still has to be the cash flow, which takes precedence. Compared to in the Midwest where your mortgage is 25% or less of rents, on good deals. Lots of room to cash out there.
One lesson that I thought from a discussion with a friend is that with equity appreciation, you only get paid once, whether it’s those two former properties worth $800k now minus mortgage/etc, vs cash-flow with leverage, where you’re planning to be making that every year.
With leveraged cash-out, you can keep taking out some equity as it appreciates, without having to sell, as long as there is still some cash flow from rents, after paying the new mortgage.
To put it in context, from over the past five years where I was laser-focused on the cash-flow strategy, I didn’t even track my portfolio by the current valuation or equity only monthly cash flow. I now do for leveraged cash-out (refinance) into LLC, combining both strategies (equity appreciation, and cash-flow).
Looking at the first one I bought for $10k cash in South Bend IN, some five years ago, if it appraises for $40k, at 75% LTV that’s a $30k cash-out, a 3x leverage on the original investment, hence “Leveraged Cash-out”.
Another way to look at the leverage scenario is so you take that $30k as 75% on one property that appraises for $40K, as cash-out and you use that as 25% down on $80-100k multi-family investment, making higher cash-on-cash returns than typical cap rate buying cash. So that original 10k cash is leveraged over 10x/times over.