In 2021, my wife and I, alongside of our friends/business partners, were fortunate enough to own two investment properties. You can read about how we purchased our first one here.

Both properties were doing relatively well - cash flowing and renting fine. We decided we wanted to grow our portfolio but we did not have enough cash saved from the first two rentals for a downpayment on a new property and we were not in a personal situation where we could afford to use our own cash.

Leveraging Properties

Instead of simply taking out a business bank loan, or using our own cash, we decided to leverage our current properties but pulling out the equity they had earned since we originally bought them. Here is where investing in real estate can be magical.

We ”cash-out refinanced” our two properties, which means we worked with our lender to take out a new loan on each of our two properties for the value it was now worth after years of building equity based on market improvement. The new loan paid off the old loan and left us with a balance of cash that we could then take and use to buy a new property. The additional benefit to refinancing is often a new, lower rate, which can lower your monthly payment despite taking out more money (not in our case, but it wasn’t our goal of refinancing).

Essentially we are using the money the properties have earned in equity and from our monthly loan buy-down without selling those properties!

Details of the Deals

• Property A

  • We bought this property in 2017 for $178,000 with an original loan amount of $131,250. Our interest rate was 3.875% (this was a rate with a 5-year arm so it was set to go up in 2022) and our monthly payment was $758.30 a month.

  • In 2021, the property was now worth $238,000 so we took a new loan of $178,500 (leaving a downpayment of 25% of the new value - investment properties require 25% instead of the standard 20%, or less, for primary residences). This paid off our balance on the old loan and then left additional cash to use.

  • Our new interest rate was 3.625% and our new monthly payment went to $966.03. This is an increase in monthly payments because the interest rate did not drop significantly because of the ARM on the original loan that was set to increase dramatically.

  • The cash we had remaining after the new loan was $52,286.06. All fees for new loans were paid from the new loans - we spent no cash out of our own pocket.

• Property B

  • We bought this property in 2016 for $235,000 with an original loan amount of $176,250.00. Our interest rate was 4.25% and our monthly payment was $1,028.96 a month.

  • In 2021, the property was now worth $287,000 so we took a new loan of $215,250 (leaving a downpayment of 25% of the new value) which paid off our balance on the old loan and then left additional cash to use.

  • Our new interest rate was 3.625% with a new monthly payment that went to $1,232.79, a slight increase in order to pay for the cash-out.

  • The cash remaining was $46,562.81. All fees for new loans were paid from the new loans - we spent no cash out of our own pocket.

The final tally was gaining $98,848.87 in cash for an increase of $411.56 a month on our loans (principal and interest payments, not just interest) and no cash out of pocket. We paid $0 of our personal money to make this happen and got nearly $100k to play with.

• New Property #1

  • Our goal was to double our properties from 2 to 4. Taking the $100k we had in cash, we went to a wholesale dealer and found a 1-bedroom apartment for $100k. We bought it outright with cash (a requirement of wholesalers).

  • Once we bought the condo in cash, we then went back to our lender and put a new loan on the property spending 25% of $100k (for a loan of $75k), leaving us with $75k to spend.

• New Property #2

  • With $75k in hand, we went and bought a $300k townhome with a new loan of $225k.

Two Properties to Four Properties

Without putting our own personal cash into the deal, we leveraged two properties, pulling out the cash earned from increased equity (and loan pay down) to purchase two new properties, doubling our portfolio from two to four. We now have four properties that cover the costs of the others so we continue to play the real estate game without using our own cash.

Bits of Honesty

• Of course, we are using our profits from the first two rental units to pay off the new loans that we took in order to receive cash to pay for the new properties, so technically it is “our own money” we are using to pay for properties, but it’s not cash out of our personal bank account and it was money we would not have had otherwise.

• This only works when interest rates are lower (or equal) to what you currently have. It would be hard to do it in a high interest-rate market.

• This only works when your property is earning equity, that is, that the property is worth more than now than when you bought it.

• This also takes time. You can’t do this 6 months after buying because you would not have enough equity built up. Real estate is a slow game (but worth it!)

Let’s Get to Work

Investing in real estate should be fun (and profitable). Let me help you run the numbers and figure out what best works for your investment vision.