I have a condo valued at 350K, the loan balance is $154K. I have a 30 years fixed rate at 3.875% on it now. I anticipatethat the rate will go up in the future years. I am thinking to cashout refinance it. My option is
1. Take out $60k, then I have a break even cashflow. To payoff my HELOC line of $60k at 5.25% interest only payment.
2. Take out 75% of the LTV, $262k, I will have a negative $300 cashflow each month. Payoff $60k HELOC, then have $42.5k on hand
3. Take out 80% of the LTV,$280k, I will have a negative $387 cashflow each month. Payoff $60k heloc, then have $60k on hand.
The new rate will be higher than what I had 3.875%, around 4.125%~4.375%.
What would you do? To keep more cash on hand, or keep the property breakeven. I am located in San Diego, California. How should I think what is the best things to do?
Thank you very much for any insights.
If I cannot cash flow after PITI, vacancy, maintenance/cap expense estimate at 80% LTV I would question this as an worthwhile investment and I say this from the perspective of a San Diego RE investor. I realize it is not what you want to hear. I will admit I purchased an about cash neutral RE at 80% property a few years ago but I believed the property had at least $50k forced appreciation opportunity and would have short-term appreciation. I was correct as a lower than expected appraisal came in $150k over purchase (was ~$40k low in my opinion) after the forced appreciation.
Today I am much less certain about near term property appreciation. I do have confidence of short term rent appreciation but you are significantly cash negative at 80% LTV. I know you can find better RE investments locally but even if you cannot to have significant equity (20% equity is significant equity) to cost you money (negative cash flow) would be similar to investing in a stock that you know is going to decline every month.
So the question is how confident are you that there will be appreciation to cover the negative cash flow? What is your profit play? I would look to 1031 it into a better local RE investment.
Thank you Dan for the reply. You are right, the property was originally purchased not for investment purpose. We lived in it and turned it into rental. I totally agreed what you said, this is not a good investment property. Since it is in a good location, if we do some renovation or upgrade (the inside is old, need updating), the rent could be up to $2100 around. So you are suggesting 1031 exchange. While, I have a hard time to find any property to be break even at current market around my area. Mabye you are an experienced investor, you could find better deals, I am new to investing, may need some advise. Thank you anyway.
@Jo Zhou In a high priced market, responsible leverage is just part of the landscape we need to master - leverage is an advantage in markets such as ours.
If you can invest the $42.5k (or $60k) and get a risk-adjusted return higher than, say, 5% annual, then do the refi and invest the capital. Take advantage of the spread.
The only reasons I wouldn't do this are (A) I have other properties that I want to save my DTI for or (B) I don't have enough W2 or other income to cover the $400/month in a worst case scenario or (C) I can't find any safe investments that will yield me 5%+ or (D) The closing costs for the refi are high.
I really appreciated your opinion. You have helped me on other topics, too. I got your reasons not to do the refinance for this property. Sure, I will not refinance this property and leave it as is until I could find a 1031 exchange property as Dan suggested to upgrade it to a better property. I feel it is hard to find also. Thank you again!
As you already know it is a poor rental choice. Based on your equity you have negative cash flow due to the opportunity value of that equity. I would sell asap as opposed to losing any more money.
Your dead equity is costing you $1700/month in lost income potential.
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