I purchased a couple residential investment properties (single family homes) 6 years ago and refinanced for 15-year terms. Now, I would like to leverage my money and have been advised to consider refinancing some of the equity out of the houses in order to purchase additional properties. Sounds like a great opportunity for me to grow my portfolio but I only have 13 years left on these mortgages at 3.25% and not sure if it is still a good idea and pull out equity or wait and pay off for cash flow in 13 years.
@Rhonda Green If you do refinance and invest the funds, will the return on investment justify the costs involved in the refinancing and the higher interest rate?
Also, if you do refi, what's the spread between your monthly debt payments and your rental income? You want to have the ability to lower rents if the economy takes a turn. If you don't have a margin of safety, your investments can turn into cash flow killers.
Well, because I bought these when the market was down I have 50% equity in these properties. I actually would like to hold them and pay off but ponder thinking I could pull out $200K+ on each property to invest in additional properties. You're right about the higher interest rate and longer terms. I may just tap in to transferring funds from my I401K and buying an apartment building. Thank you very much for your input and thoughts.
The other way you could use the equity is by using it to secure a line of credit. This would allow you to keep your current financing in place. You'd have to find a bank that would allow you to secure the line using second liens.
True, good point. A little scary not knowing how quickly short term interest rates are going to be raised.
Im not big on leveraging. If your income does not necessitate you needing more income from rentals then paying them off is the smart move. I will get flogged for saying it but debt free let's you sleep well at night.
@Rhonda Green I agree with @Jonathan Towell that a HELOC used wisely could be a good option. If you can get a HELOC, make other investments and have the cash to pay them off relatively quickly then that might be the way to go.
I also agree with @Timothy Aughinbaugh with the fact that paid for rentals is less risk. As mentioned you will sleep better at night. You will not get grief from me Timothy, this is something that every investor needs to consider in my opinion.
I think it just comes down to managing your risk, your income and debt. You will probably get a lot of different opinions but it comes down to your person situation.
Personally, we have a rental with a mortgage and HELOC on our personal home, but the HELOC will be paid off this year and we have a lot of "extra" income/savings if anything were to happen.
Thank you to both of you. I agree that being able to sleep at night is worth more than anything, actually. I'm just trying to grow my wealth as much as possible during my most formative years (I'm 47) and self-employed as just have a I401K which has lagged at best even thought I have had for 20+ years. As many other people, I've lost 50% of my retirement twice. I seem to do better with real estate but definitely do not want to get to far stretched that I could everything I've worked hard for.
Calculate your return on equity which is how much deployable money if you sold (sold price minus expenses like commissions minus mortgage). If your in the 2nd half of your mortgage then you will be having much more of your payment going to the principal but your return on equity will suffer. Remember if your return of equity is less than 10% your better off in the god forsaken stock market.