I apologize in advance for the long post. I am new to real estate investing. I currently own a property that is out of state, that I bought while in school that is being managed by a property management company. I'm trying to determine the best way to leverage this property in the most effective way
Purchase price: 164,000
Zillow estimate: 172,000 (just a quick prelim number)
15 year note ( ~7 years 88,000 remaining)
Expenses: 500 (~22% of income)
Mortgage pmt: 1740
I ran the numbers so far this year, and if you assume the 50% rule the way that I understand it the property is NOT cash flowing. However, at the current average expense rate of about 22% (including prop management fee) it's averaging a cash flow of about $60.
I was considering doing a cash out refinance with a 30 year note, and using the cash on a down payment on a deal in the DFW area where I live. Then not only would the property cash flow much better but I could also continue investing closer to home.
If I understand correctly, to do a refinance you would refinance 80% of the market value which would be about 137,000 in this case. After doing a quick refinance calculator I found online the new payments would be about $800.
The lower payment would allow the property to cash flow about $350 ( with a 50% expense assumption) if I calculated it right.
New CashFlow= 2300 - (2300*.5) - 800
I have 2 questions:
1. Are there any options that Im not thinking about, or any pieces of these options that I haven't accounted for.
2. Would it be better to just hold out the remaining 7 years on the loan so that the note will be paid off much sooner or go ahead and re-finance.
any advice or being pointed in the right direction would be appreciated.
Personally I think you should hold out for the next 7yrs as the goal in real estate is to own free and clear. I put most of mine on 15yr loans and my cash flow was cut in half but if I can hold out long enough it will pay off. Your so close, dont ruin it now.
It is attractive to refi and get some cash to do more and get a lower mortgage payment. There is technically nothing wrong with that scenario but you are almost to the finish line.
I'm new to investing, but spent 20-years in banking, so the financial part is a little clearer to me. In my opinion, the question starts with what your goals & philosophy are, what your time horizon is for those goals and how well you know yourself!
If, for instance, your REI philosophy is that of a buy and hold investor, with a goal of owning 5 properties (or cash flowing $x amount per month) within the next 3 years, then it makes a lot more sense to refi now to facilitate your goals. Even if your passion is to become a flipper, if you have a goal to flip 1 house per month over the next 12-months, and you need cash to start that process, then a refi now is still a good move. If you're simply looking to pick up houses along the way, as a part of your retirement planning, then hold on to the property at the current financing level and let it pay off, then bank the cash flow for down payments on the next properties.
Also, and this is the part about knowing yourself...or at least knowing how disciplined you are. Refinancing the property to pull money out to start flipping or to purchase more holds doesn't mean you can't still pay off the property before the 30-years is up on a new mortgage. If you pull the money out toward new deals, regardless of the type of deal, and you getter better at your deal making so that new buy & holds are cash flowing or producing at better rates, then you pay off whatever property you owe the least on.
Anyway...my 2 cents!
I agree with @Curt Davis don't ruin a good thing when you are almost to the finish line. In 7 years the payment goes away and you will be the king of cash flow. See if you can acquire a second property with creative financing. If you can do 15 year financing on that and then put the cash-flow from number 1 on it when it is free and clear then #2 will be paid off really quick. Somewhere in there start with # 3 and then put the cash flow from 1 and 2 on that loan and you will soon be buying a property every couple of years with awesome cash-flow. if you ever need more income due job loss or life expenses just hold off on the extra payments and/or do a "recast" on the loans where you have paid early.
Free eBook from BiggerPockets!
Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!
- Actionable advice for getting started,
- Discover the 10 Most Lucrative Real Estate Niches,
- Learn how to get started with or without money,
- Explore Real-Life Strategies for Building Wealth,
- And a LOT more.
Sign up below to download the eBook for FREE today!
We hate spam just as much as you
Join the Largest Real Estate Investing Community
Basic membership is free, forever.