The Fastest Way to Grow Your Portfolio
In a high appreciation market, expanding your portfolio by cash-out refi is the fasts way to grow your portfolio with reasonable capital investment. To demonstrate the advantage high appreciation offers below is an oversimplified example comparing two theoretical properties. The purpose of the example is to demonstrate how much investable cash you will have at the end of 5 years. Property A appreciates at 7% annually but has zero cash flow. Property B has no appreciation but has a 7% cash flow. I made the following assumptions to isolate the appreciation vs. cash flow results.
- Combined state and federal income tax rate is 30%.
- Purchase price: $400,000.
- Down payment on real estate: 25%
- Acquisition cost: $100,000 (25% x $400,000)
- No inflation
- No rent increases
- No loan costs
- No closing costs
- No vacancies
- No maintenance cost
- No management expenses
- No principal pay down
- Because property B has no appreciation, there will be no rent increases.
Below are the two models.
| Property A - No Cash Flow | Property B - No Appreciation | |||
|---|---|---|---|---|
| Appreciation | 7% | Appreciation (%) | 0% | |
| Market Value | 400000 | ROI (%) | 7% | |
| End of year 1 | 428000 | Annual cash flow | 7000 | |
| End of year 2 | 457960 | Taxes (@ 30%) | -2100 | |
| End of year 3 | 490017 | Annual after tax cash flow | 4900 | |
| End of year 4 | 524318 | Investable Cash after 5 Years | $24,500 | |
| End of year 5 | 561021 | Investable Cash after 5 Years if you ignore taxes | $35,000 | |
| 75% cash-out refi at the end of year 5 | 420766 | |||
| Pay off the existing loan | -300000 | |||
| Investable Cash after 5 Years | $120,766 |
You can see, appreciation and cash-out refi enable you to have far more investable cash at the end of 5 years. Note that 2021 YoY appreciation was 32%, and rent increased 18%. So, the above example is not unrealistic. Also, since appreciation is ongoing, you will have the opportunity to do a cash-out refi every few years.
On cash flow, appreciation and rent are tired together. If you have appreciation, you will have rent increases. So, over time, a high appreciation market will always have a higher cash flow than a low or no appreciation market.