Who's right?

Question

My wife and I are arguing about this. We have several rental properties and cash flow well enough to make all the payments.  I have a full time job and am investing for retirement. She wants to refinance some properties to pay some others off to improve our monthly cash flow. I say no because its robbing Peter to pay Paul and we would be owing more on some houses than what we could sell them for. Who's right? When is it smart to refi??

James Vermillion · Answer

Brandon Turner's wife must be looking at the screen again!

I still don't fully understand the argument for re-arranging the debt.

Brandon Turner · Answer

My vote is that the Wife is always right :)  Happy wife, happy life!

Brian Mathews · Answer

Why not sell some of your more pain in the butt properties and take that money to pay off a few.  There are always a few maintenance hogs in there that cost you that you may not miss much in terms of cash flow if you're paying out a lot on them.

Wendell De Guzman · Answer

I like the proposal of Brian Mathews, sell your problem properties or lower cashflow properties to the hedge funds stupid enough to pay market value for them :-)

Then use the sales proceeds to pay off the mortgages of your best properties in good areas so you can have more cashflow.

So in a way the wife is right... (LOL)

David Beard · Answer

Extending the amortization period to lower the mthly payments is potentially very reasonable.  It sounds like cash flow is tight enough to alarm the missus.  At some later date, if things turn bad economically and cash flow turns considerably negative, then you might not have the luxury at that time of being able to refinance.  If your gross rents are currently less than 3x your P&I in aggregate currently, then in my view you are very tight on cash flow (and preferably 3.5x) and not in good position to weather adversity.

With 29 properties, all the debt introduces alot of financial risk, where circumstances cause a large drop in market rents and/or high vacancies across the board, and the problem could overwhelm the ability of your non-RE income to bail you out.

Also, if your liquid reserves are less than 6 mths P&I on all your loans, then likewise you need to shore that up.

If you can create some free & clear properties by paying off the mortgages, you also have the benefit of being able to transfer them to an LLC to potentially provide some shielding from creditors if problems ever occur in the leveraged portfolio.

Michael Seeker · Answer

It sounds like the only way this could increase your cashflow is if you're refinancing into a lower interest rate and/or paying off a higher interest rate loan.

That being said, I would strongly take into consideration how long the loans have been in service.  If you're anywhere past the first 5-10 years, then paying off one loan early might result in a slightly higher cashflow, but lower paydown on a monthly basis.

For example, I'd rather have a payment of $1000 made up of $500 principle + $500 interest than a payment of $800 made up of $100 principle + $700 interest.

Just something additional to consider.

-Michael

Todd Carel · Answer

Her argument is simply to increase monthly cash flow. No problems with needing more money to buy properties. We do have a lot of debt. But we have 29 properties. We can pay our obligations. Some months are better than others.  I think she just wants more of a cushoin

Wayne Brooks · Answer

The wife's not right this time.  If you do lower your monthly payments by refinancing, that means you extended the number of years to make payments.  The whole idea of getting to retirement is to make the payments sooner, rather than later!  I'm sure wife is right about everything else though (wink, wink).

Phil Z. · Answer

Explain how moving debt saves you money?

Troy Fisher · Answer

Is her arguments that since the debt payment would be focused on fewer properties that you are going to be more aggressive in building equity and paying off debt?

Is it because you've reached some sort of mortgage limit and by paying off a couple you can purchase some more?

I think asking, who is right, refi or don't is not a question that is going to get the right answer the correct question is:

[i]"My wife thinks it's time for us to refinance half of our properties so that we can pay off the mortgage on the other half of our properties, she argues that by doing so we are going to lower our monthly debt service and are going to be able to apply all of the previously scheduled debt service to fewer debt obligations.

I think that maintaining our current mortgages the way they are might make it easier to sell one or two of them if something goes awry."[/i]

You might get better responses than: Happy Wife, Happy Life.  But then I don't have a wife, and my life is pretty happy.  :biggrin:

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