How to Maximize Cash Flow with a Cash-Out Refinance?

Picture this scenario: You decide to embark on an extensive renovation project to upgrade your rental, but halfway through the remodel, you realize you’ve exceeded your budget and you’re now strapped for cash. Rather than taking out a second loan, which is an additional payment you have to worry about, you could easily tap into your home’s equity and convert it into readily available cash. But how do you get the most out of your cash-out funds? Continue reading below as this article focuses on how to maximize cash flow with a cash-out refinance. 

What is a Cash-Out Refinance?

Before getting into the nitty gritty of how to keep your wallet balance green, it’s essential to understand what it is and how to evaluate the risks of using cash-out refinance options to upgrade your property. In a typical loan structure, you take out a mortgage with the promise to repay the full loan amount over a certain period. For example, for a $200,000 house, you may have fifteen years to pay it off in smaller monthly chunks. 

A cash-out refinance is when the homeowner replaces that current $200,000 mortgage with a higher one of say $300,000, allowing them to take $100,000 in cash. The extra money would usually come from a portion of your home equity, making it two transactions in one. Most lenders expect you to maintain at least 20% of your home equity, so there is a limit to how much you can expect through this financial process. However, once you qualify for it, there’s almost no limit to what you can do with it, giving you the needed funds to expand your portfolio or grow your home’s value. 

How to Run a Realistic Cash Flow Analysis?

Pre-Refinance Cash Flow Breakdown

Before moving forward with a cash-out refinance, it’s critical to know where you stand financially and how it will affect your cash flow. That way, you can avoid surprises and be in a better position to decide if a cash-out refinance is the best option for you. 

Get a full financial picture by calculating your total expenditure and subtracting it from your total income. For a full view, it would be best to keep track of all your spending and assets. Major monthly expenses typically include food, utilities, mortgage repayments, and taxes. If you also pay for subscriptions such as Wi-Fi or streaming services, you should also include that. On the other hand, most property owners make their income through rent. 

With those figures in mind, you can use the formula below:

Pre-refinance Cash Flow = Total Income – Total expenditure

If the value is positive, you’re living below your means and can probably afford to take on a cash-out refinance. However, a negative number means you’re in debt and probably need to focus on reconciling your financial health before taking on a bigger mortgage. 

Post-Refinance Cash Flow Breakdown 

After getting a more holistic idea of your pre-refinance cash flow, you can move ahead by consulting your bank or another lender. Before signing the dotted line, it would be wise to evaluate the impact on your financial health. Remember that a bigger mortgage comes with a bigger monthly repayment, and could easily push your cash flow into the negatives. 

Ask your lender for the fine details of the new loan terms. Information like the new principal, interest, and rate will give you a better idea of how much more you have to pay monthly to meet your financial obligations. Besides that, the purpose of the funds you receive can also affect the final figure. For example, if you use the cash-out to pay off long-standing debts, that could significantly reduce your total monthly expenditure and the final income. On the other hand, using the money you get to invest in a major renovation will mean spending more money and increasing your expenses. When you’ve arrived at a final figure, you can compare it to the pre-refinance cash flow and determine if a cash-out refinance is a good idea for you. 

Smart Ways to Use Cash-Out Funds

Property Upgrades

One of the best ways to use your cash-out fund is for a property upgrade. After all, it would essentially be putting the money back into the house. Besides attracting newer tenants and making existing ones happier, increasing your home’s value also increases the equity. However, you have to focus on upgrades with a high ROI, like a fresh coat of paint, a high-efficiency HVAC system, or smart home technologies. It’s also wise to research local real estate trends to know what tenants in your area are looking for, so you can invest in the right upgrades.  This option is especially worthwhile if you’re doing a fix-and-flip. 

Acquiring More Rentals

Another way you can use your cash-out funds is to acquire more rentals. Consider turning your property into a rent-to-own agreement in case the flip does not sell, so that you can earn passive income. Besides, real estate is a great way to hedge inflation because it appreciates over time, so your investment retains its value. That means you can use your rental income to pay off your mortgage while the property continues to appreciate. Landlords are also entitled to specific tax deductions like utilities, repairs, and wages, which can help you shave off a significant portion of your expenses. 

Use as Emergency Fund

Protect your existing cash flow by using the refinance cash-out as an emergency fund. It’s responsible to have extra financial support when something unexpected happens, and if you’re already low on cash, you could easily be stranded. Using your cash-out refinance as an emergency fund means that you’re prepared to take on surprise repairs or cover debts without liquidating your assets completely. 

Conclusion 

A cash-out refinance is a financial transaction that allows homeowners to replace their existing mortgage with a larger one, while getting the difference in cash. This money can then go to important projects like expanding your portfolio or buying new property upgrades. The extra cash also comes with added peace of mind when it acts as an emergency fund. However, it’s essential to perform a realistic cash flow analysis to ensure it’s the best decision for your financial situation.