Cash out Refinance OR ???

Question

Hello again everyone,

This question has been bothering me for quite some time now, so:

I have a one door condo flat on the second floor w/ HOA that currently cash flows about 400/month.

Purchased the property for $110,000 and the bank required $50,000 down (not dealing with this bank any longer).

I put roughly $7,000 worth of work into the property and the unit will need a new AC unit next year ($4-5,000)

5% over 25 years.

Current value is between $160-165,000 (comps in the same HOA).

Currently sitting on about $40,000 cash to cover any possible problems and looking for deals (dry in my area).

Have two identical units, plus another similar unit that I live in.

-- SO --

Should I do a cash out refinance on the property and lower my cashflow to roughly $100/month, but pull out roughly $60,000?

Should I do something else?

Am I missing a larger picture?

Marc Rice · Answer

@Lawrence Paul

I like some of the options @Dave Foster mentioned. I think at least take out a HELOC on the condo. I would caution pulling out too much cash on the refinance whereas the numbers become too tight to hold if it goes vacant.

You could look into doing a reverse 1031 exchange too if a new opportunity arises that you want to buy come available and then you could sell the condo to pay for the new property.

Alex Olson · Answer

@Lawrence Paul I would recommend buying a true investment property with the 1031 exchange proceeds of selling your condo. You will do better in the long run and you won't have any tax consequences if you do a 1031 exchange through a QI like @Dave Foster. If you can't make something work in your market, I would look to midwest markets like KC. I have heard good cash flow in Cleveland, Indy, st louis and others but I only know the KC market extremely well. I hope this help.

Dave Foster · Answer

@Lawrence Paul, If the cash would be for reinvestment then a refi to a much lower NOI isn't a bad idea.  But if you're just pulling cash out to be safe or to pay personal expenses that's a hefty price tag to pay.  And the pattern for most folks is that paid off debt usually reappears.  So you might be significantly lowering your NOI permanently for a temporary fix on total cash flow.

Here's another thought.

1. Sell the unit you live in - take the gain tax free

3. Move into one of. the rental units and convert it into your primary.

4. Get a heloc on your new primary and keep it open but untapped until a good investment opprtunity comes along.

5. combine some of the $40K in reserves you don't need anymore plus the tax free cash from the sale of your prmary plus the heloc if you want and go buy some better performing investment property with better financing.

I just paid off a heloc I had opened 6 months ago because I was able to get a 30yr fixed at a rate that was cheaper with principle and interest than the heloc was for interest only - and it floated with prime.

There's some really good options available to you

Zachary Ray · Answer

@John Warren is spot on. Pull out if you plan to hold long term and recoup some expenses lost. Sell if you don't intend to keep but roll it into a smarter cash flowing asset.

Lawrence Paul · Answer

Thank you for all of the ideas.

Currently have tenants in both units and their leases expire on 08/01/2021.

Thinking about just holding my cards and 1031 exchanging into a 4-plex of some kind.

Would really love to 1031 into an 8 unit type, but my net worth will not cover the commercial real estate requirements.

John Warren · Answer

@Lawrence Paul I always like to pull cash out IF I want to hold the properties for a long time still. If the cash flow gets too light, then it may not make sense to do a cash out refinance. In that case, maybe do a 1031 exchange into larger properties to roll your equity along with no immediate tax consequences?

Cash out Refinance OR ???

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