Refi before the downturn?

15 Replies

I've been reading David Greene's BRRRR book and have sort of accidentally been using elements of this method for years but have a new scenario with lots of moving parts and thought I would throw the variables out there and see if I could get some help from those of you who know much more than I!

Okay, so I own 4 rentals total, one is an SFR Airbnb here in SoCal where I live. It's been bringing in a nice income for the last 5 years (3-4K net monthly) and I have about 450K equity in it. I also have 3 rentals in Pittsburgh PA. The first one I bought a few years ago, paid 25,5K cash, put 7K in and ended up netting about 6K yearly. I recently refi'd that property and pulled out 20K to help fund 2 more SFR purchases in Pittsburgh. I used an additional 22K from a HELOC on my primary residence for the down and rehab, so that's a total of about 45K for down and rehab for 2 houses. I raised rents on the first one (purchase price 39,5K) from $550 to $775 and the second one (purchase price 44K) from $700 to $995. I used a commercial lender to do loans on both these houses plus refi the first house...all on a blanket loan.

So my question is should I try and refi my 2 new rentals into conventional loans? My current commercial rate is 5.4. Thant said, I don't have a ton of money in the deals and it's only been 4 months since I closed on these. I obviously wouldn't be able to pull much out since I only have 10K in each deal and I think they would each likely appraise for about 10-20K higher than purchase price. The comps are all over the map.

And the other question is whether its better to refi my Airbnb or take out a HELOC on that. There's about 450K in equity in this guy but I have a decently low rate on a 30 year fixed loan on it.

I want to pay off the HELOC I used to purchase these last to rentals (balance of 23K on my primary residence) and use the remainder of the refi or investment HELOC money to go and reinvest on another "cash" deal.

Hoping there aren't too many details here to make sense of all of this!

I'm on the brink of making this a more full-time endeavor, been listening to the BP podcasts on all my commutes and am just hoping for your seasoned input here! I love this forum and have learned so much just reading about other people's experiences. Thanks for your thoughts!!

Hey @Chantelle P. !  I think in general it either makes sense to refinance or it doesn't.  I am consistently trying to illuminate people in my sphere that doing things based on a belief that there is an impending market correction is the very definition of speculating, and speculating is not investing.  They are different beasts, both with the ability to earn from, but different.

As you evaluate each property and the financing situations that you can be in with them it is awesome that the current interest rates allow you to LOCK IN the historically very-low rates for 15-30 years on the primary mortgage market.  That is fantastic!  That would be fantastic even if the market didn't correct in the next 2 years.  It's objectively good.  Having a commercial loan with a interest rate that is really good now may make sense for you, but you also might determine that with that much equity and the potential of getting that already low rate even lower, AND fixed for the life of the loan is just too good to pass on.  That would be great 👍🏻 

I think the end results of this way of thinking may be the same as when people are trying to "time the market' and avoid the "inevitable correction", but learning to think and act based on the observable, knowable facts instead of market-hype fueled by gurus who are trying desperately not to get caught unawares like in 2007.  Yes, the sky might be falling, but if we adjust our business strategy every time someone calls that out, we'll be running from crisis to crisis.  

Since mentality is so critically important in REI, I wanted to elaborate on this a bit. Good luck in the journey!

@Chantelle P.

I am assuming your commercial blanket loan is in the 20 year range. I would rate term refi the 2 new rentals into conventional loans at 30 years to maximize cash flow and (if you are okay managing your STR for years into the future), 70% ish cash out refi it. Use the proceeds to repay the HELOC on your primary and the rest can fund further investing. I'd be surprised if incurring application and closing costs would ever be worth 10k cash outs and subsequently would advise you against drawing on the smaller equity amounts.

@Todd Rasmussen

Thank you so much for taking the time to read my LONG question here! This is some solid advice. 

Yes, the commercial blanket loan is a 20 year. And I should know this but is it cheaper to do a rate term refi than a cash out on the 2 new rentals? I agree it's not worth it to pay 3K in app and closing costs for 10K. 

Thanks again! I really appreciate your feedback. 

@Chantelle P.

It's cheaper in interest rate, but closing costs shouldn't differ. What's the cash flow on the two with the commercial loan now and if you decided to pull the 10 k out?

Originally posted by @Chantelle P. :

And I should know this but is it cheaper to do a rate term refi than a cash out on the 2 new rentals? 

Hey there from the opposite end of OC. We're at the tail end of a cash-out and it has been treated as if it were an entirely different animal than a rate term refi. I believe the rate is worse with the cash-out.

Not that anyone expects the Great Recession again, but one difference between a HELOC and a cash-out is that the HELOC can be shut down if the banking sector gets spooked like they did in 09. Maybe you pay off your Pittsburgh properties and buy more, but whatever credit line you have left could be pulled out from under you. They can't do that with a cash-out. Of course with a cash-out you're paying interest on the whole amount from day one.

We're in a similar situation to you. Would have chosen the HELOC all day long if our property wasn't in Texas (Texas limits HELOCs).

@Will Fraser I would not refinance. You will get eaten alive in finance fees. Wait 12-24 months.

I started in REI in 2016. Everyone was talking about a recession. We're still waiting. Almost 4 years later.

Rates will likely keep going down in the next 1-2 years. If you wait you will probably get a better rate

I think you have a lot of dead equity, particularly in the short term rental. There are a few options for it, such as a HELOC as you mentioned, or Visio, FOAC and the like, who will finance short term rentals.

@Todd Rasmussen

Thanks Todd. The cashflow is about $200 on each but that included the cost of the HELOC interest. If I do a refi on the STR I'll pay that off. I haven't yet done the math on where that would put me with a 30 year conventional. That's what I need to do next I suppose...and if rate are likely to keep dropping perhaps I'll wait a bit any kind of refi on the PA SFRs for a little.

Thanks again for your input. I really appreciate it!

@Michael Tyler

Hey thanks! I like your thoughts on HELOCs or any kind of credit line getting pulled in the case of a recession. That makes sense! 

And I'm with you on having to learn the ropes with financing in different states. The first time I went to purchase properties in PA I was in big shock over how stringent their loan guidelines were. But this is why creative people do well in REI right? :)

@Kerry Baird

That's exactly what I was feeling. It does cost money to get my hands on the equity in that STR but the money is sitting there useless in the house so I think it makes sense to put it to use! I've taken out 2 other HELOCs in the past and spent them only on the HELOC can be a really powerful tool I know. Looks like this one's just going to cost me a bit more sadly.

@Chantelle P.

Happy to help. Just be careful about loan applications. We went shopping for tenths of percents and a couple hundred dollars on closing costs and ended up tanking our credit score with new inquiries and young average age of accounts (although the latter was unavoidable). If the savings or cash outs are not significant I would not waste the credit app if you are going to continue to scale by leveraging equity. Also, call our primary lender. If you aren't already in love with your own, she'll become yours too lol. Shes really great about going through a strategy with you, and might have additional insights for what you are considering. I'll message you her contact details

@Chantelle P. based on what you described, I think you are good with your current situation. It will be hard to get fixed rate mortgages on those low value properties. The closing costs will probably not be worth it.

I would be hesitant to pull equity out of your CA property. The higher payment will reduce your monthly cash flow. That may not be a problem based on current STR income, but what happens in a recession when people reduce travel and that income falls? Also remember that CA is one of the most volatile real estate markets as the economy swings up and down. You don't want to be caught with a high payment and no equity.

@Joe Splitrock

Thanks for your thoughts here Joe! I really appreciate the balanced input...I'm definitely crunching numbers on a new payment on the STR. Thankfully payments would only be about $200 higher and I would still have quite a bit of equity even if the market falls quite a bit. But I'm going to consider possibly pulling a bit less out just in case. And I'm trying to keep that savings growing also so I can get back out there and find another deal.