Pasadena, CA · Member since 2018 · 7 posts · 1 vote
I'm looking for ways to finance my next purchase. I'm could do a cash-out refinance on a rental I own since the LTV is 57%. Currently, it has $150/month cash flow. If I refinanced to an 80% LTV, I could get $180,000 to spend, but at that maximum level the cash flow would plummet to an $850/month loss. I wouldn't do THAT much, but how low would you let your cash flow go in order to unlock home equity for a new purchase?
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
7y
Originally posted by @Account Closed:
@Joe Villeneuve What Michael said.
You're rationalizing a bad deal by saying you can afford to make a bad deal. Here's what's really happening. You have a good deal (the 2nd property), that is being robbed by the bad deal (the 1st property).
Look at it this way. Your money is working two jobs. One job you are getting paid to work. The other one, you are paying your boss for the privilege to work...and you're OK with that because you're working two jobs, and the 2nd one is the one paying your boss. If your money started with the second job, and you added the first one to it, that would mean your money would be working twice as hard for less money.
If the value of the 1st deal is the equity, and you want to access it (I would too), you have 2 choices:
1 - REFI it, and make the 1st deal a bad one now, or...
2 - Sell it, and replace it with another good deal like the 2nd one. Either way, you would have two properties...but in the 2nd option both deals making money for you.
Don't get emotionally attached to your properties...or specific money in any property.
I've also been curious about this exact same dilemma for a while now. Thanks to all the folks who took the time to explain the benefits. I have a follow up question... As you do more cash out refinances on properties, wouldn't that add more debt to your debt/income ratio, eventually disqualifying you from more loans/mortgages?
It probably should/could/does. It just doesn’t seem to come in to play for some reason. I suppose most people that buy $400k rental properties probably have a good w2 income.
BUT... from 2008-2013 I bought 10 properties while being unemployed. (My wife makes about $90k as a nurse.) but our monthly payments on a little over $1.5million I borrowed is almost $12k per month. So here’s some crazy math in there somewhere. Every property I bought I had a renter lined up with a lease and it cashflowed at least a little with my 25% down. I guess they assumed I would have more than I have now and I’ve never missed a payment on anything in 30 years. That should be worth something.
Ps. Now you see why I’m jealous of his $420k in appreciation on 1 $380k property. I have 12 properties and maybe $2 million total appreciation.
Investor · New Haven, CT · Member since 2012 · 285 posts · 175 votes
7y
@Bill Brandt
How can you say that cash flow doesn’t matter? It’s not a sustainable business model to hold negative cash flow buildings. This isn’t Uber, profits matter.
Richmond, TX · Member since 2018 · 29 posts · 31 votes
7y
One note that I haven't seen mentioned: when you're doing the original deal analysis and making your offer, I'm finding that it helps to run the numbers twice: once at the time of purchase, then projecting the numbers 12 months to the time of the refi.
If you're planning a BRRRR, you can then play with a few of the numbers on the second scenario - what is the MOST you think you might spend on repairs? What is the worst that rents might be after the rehab? Etc.
I'm making my offers based on my requirement that the property model cashflows a decent amount *after* the refi and all my reserves are taken care of. If you don't do that, then you're running a greater risk of being surprised when you go to get your money out of the property.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
7y
Shawn. Are you saying stocks aren’t a valid investment? They don’t cashflow?
Profits don’t equal cashflow. If $100/mo cashflow is required for you to be able to invest in real estate you’re not ready to invest in real estate.
The original poster has made $150/mo times 7 years in cash flow about $13k. I don’t know how much “profit” he has in loan paydown but it’s pry more than $13k. And he’s made $400k in appreciation. Which one “matters” more? would he be better off if his cashflow was $300/mo and his appreciation was zero?
Ps Did you notice he has NEGATIVE $80k invested in this deal? He put $80k in and took $160k out to buy his primary. Imagine being paid $80k, to own a property that has $400k in equity.
“Nobody” invests in California for cashflow and “nobody” invests in the Midwest for appreciation. People who make $200k/year at their job couldn’t care less if the property is positive or negative $200/mo it just isn’t needle moving money
There’s 100 different ways/reasons to invest in real estate and they cater to different needs of the investor. cash flow, tax free income, deductions, house hacking for cheap rent, appreciation, etc...
Investor · Member since 2017 · 239 posts · 149 votes
7y
@Douglas Goldstein what interest rate are you getting in the refinance? Maybe you can get it to break even by researching more to get a better rate? Or private notes or seller financing etc.
Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
7y
@Account Closed you've received some good comments here and hopefully it gives you a little better idea of where you should go in this process.
Since the refinance would put you negative $850 cash flow a month it is best not to do it at this point in time unless the property you are buying will cash flow more than $1,000 a month.
As many have stated the best option would be to sell the property, either buy additional out of state properties that cash flow or buy something else here in the Los Angeles area that will see significant appreciation over the next few years.
As you know it's very difficult to cash flow here in Southern California so most of my clients buy here for appreciation and out of state for cash flow.
In your situation it is very likely that the condo has achieved very close to the maximum appreciation so it's time to sell.