Cash out - should I do it?Many investors struggle with the decision to cash out part of their hard earned equity. For those who do not know, this is when a lender allows one to receive a portion of their equity, in the form of spendable money. This is done by increasing the amount of the loan, up to the lender's LTV requirements. Since the money received is actually part of a loan, it is not income and therefore, tax free. Should I receive cash out? In my opinion, yes...absolutely. The exception are those who already have substantial incomes or are otherwise comfortable with their standard of living. Leave all the equity you can in your properties. This will allow you to pay off the mortgage faster. Most of us do not fall into this category. Most of us could use substantial, tax free cash to make life more comfortable. However, just as importantly, this extra money serves as a reserve to protect me and my LENDER from unforseen financial challenges. The biggest issue with taking this money, is the increased mortgage balance, which means increased mortgage payments. This sometimes results in negative cash flow. Example 1 - In my area, a good cash flow from a property is $200 per month. If you never have a maintenance issue or vacancy, that would yield a profit of $20,000 in eight years. Of course you will have maintenance issues and will likely have several periods of vacancy over an eight year time span. This means any repair costs will come out of your pocket. This also means you will pay the mortgage out of your pocket, for any month your property is vacant. In my area, a net profit of $10,000 over an eight year period, for one property, would be very good. Example 2 - The lender allows you to take $20,000 cash out at the purchase or refinance of your property. Let's say you now have a negative $200 per month cash flow. Put aside three years for this shortfall, which will lessen every year, due to your annual rent increases. For my area I would put away $6500 to cover my shortfall for three years. I would put away another $3500 for maintenance and any unforseens, for a total of $10,000. What is left is $10,000. I now have eight years of profit in my bank account within the very first days of owning my property. Which scenario would you prefer? I know I did not account for all factors, but this is generally how it works out. In my opinion, taking cash out is a no-brainer. It covers maintenance and any other financial issues with my properties, without burdening my personal resources. From a financial standpoint it is always better to have money now, than money later. Besides, the piece of mind that comes with money in the bank is awesome. This allows you to comfortably stay current with your mortgages, which keeps your lenders happy. Keep your lenders happy, and they will go out of the way to ensure your financial success. Taking cash out also serves as insurance in case your financial situation changes. What if you lose your job or your credit score drops for reasons out of your control? If any one of these things happen or anything else which changes your profile, you will no longer qualify for a refinance or any other loan, under the terms of your original profile. In fact, you may not qualify for a loan at all. Your equity is now useless, because you can no longer access it. This, above all reasons, is why I believe you should take cash out at the beginning. It then sits in your bank account, under your control, if you ever need it. Take your cash out while you qualify to receive it. You never know what the future holds. Many investors have found this out the hard way.
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