Discount points on refi for (future) rental property?

3 Replies

If my intent is to convert our current home to rental when we upgrade and hold indefinitely (i.e., long past the break even date), is there any reason I wouldn’t want to consider purchasing discount points from the refi lender? On paper it seems like a can’t lose, if we assume the property will be cash flowing on day one. Wanna help me pick apart the logic? (For the time being, lets ignore the opportunity cost of burying 8-10K for purchasing the discount during refi instead of investing elsewhere. Let’s also assume adequate cash reserves on hand for personal and business emergency.)

I'd say don't pay them. Aside from my mother who saw her 30 year fixed out from 1976 to 2006, loans never seem to last that long. So frequently you'll be selling or refinancing in 3-5 wondering why you paid them. I think statistically loans on avg last just over 5 years but I'd say among investors such as ourselves that number is lower. Plus opportunity cost which I know we're ignoring but maybe we shouldn't =]

Hey @Matt Hoyt thanks for the wisdom. Do I take your point to mean that, even for long term buy and hold plays, a serious investor may be going back to refi every couple of years anyways? Does it change the calculus at all if the property (admittedly our first home, so we didn’t buy for income potential) will just barely cash flow without it, but might earn enough “extra” to pay for the points before a typical investor-refi?

@Tim Joyce yes that's exactly what I am saying and have found in the many many loans I've dealt with. And to each his own I'm not saying you'd be crazy doing it but I wouldn't.

There are a 1000 ways to think about it but here's one: If you were buying 10 houses would you pay 80-100k for discount or you just buy another place and have 11?

Separately, I would analyze the property as if a average buyer would be buying it. Cause that's who you'll sell it to eventually. And the standard wouldn't pay the discount points so that's the cash flow they'd get. And if that works for you then it works for the masses.