Property Owners: Should You Buy Now or Refinance Existing Props?

Question

With all the fear that is out there & talks about a recession I'm curious what the BP communities thoughts are on this topic.

Supply being so low has really inflated the pricing in our market (Twin Cities) so do we sell & capitalize on the profits? We'll pay for it on a subsequent purchase, but demand for 1-4 unit buildings is insane.

Or, do we wait this out & simply refinance?

It's a broad question but curious about trade offs between both options.

What would you do? Both as an owner/non owner occupant?

Anthony Wick · Answer

@Steve Gerten. We are straight up long term buy and hold multi-family. I am in the middle of four refinances right now. A couple cash outs on 10 year balloons, and a couple interest rate adjustments. Since we can't find any deals right now, I'm positioning myself for when I do find that next deal. As always, it just depends on your short and long term goals.

Matt Higgins · Answer

@John WoodrichYep, 15 year LOC is great.  I should have talked to you before I did my latest.  I have one bank that makes me renew annually and one that does every 3 years.  I was doing the online real estate investing bootcamp with Rod K a couple weekends ago and he suggested pulling the entire value of the line and depositing it in another bank so the bank can’t claw back the money at anytime.  Personally, I wouldn’t want to pay interest on money I wasn’t using, but I guess if people quit paying rent I might resort to that strategy.  He had had his LOC called with out warming.

John Woodrich · Answer

I started investing in 2007 and we started using LOCs to pull equity around the 2008-2009.  We didn't have any issues with them being called, ours were 15 year lines, maybe yours was different with an annual renewal?  You would have to read your loan docs to figure out what your rights are vs theirs in calling the loan.  I wasn't connected to many/any investors when I got started so not sure if my local credit union experience is normal or not.  I am very connected now and haven't heard of banks calling LOCs.

Julian Vasquez · Answer

We had a LOC during the 2008 crash and the bank closed it without notice. I am in the process of opening up one now, but I am concerned that should the timing be "right" to pull the money out for an investment that the banks may close them. Anyone have any experience with this or what rules govern these bank actions?

John Woodrich · Answer

@Matt Higgins I have been hibernating a bit with tax season.  On one of my LOCs I had to pay for an appraisal but other than that no other costs.  Like you I have some paid off property that I use them on so they are 100% collateralized by RE.  There are companies out there who will do non-collateralized LOCs or loans and I agree, those options aren't cheap.  LOC is a good way to maintain some liquidity while not paying interest on cash sitting in an account.  If one was to complete a cash out refi for $100k, it may cost them 2-3k in fees just to get going.  Sounds like points on a HML :)

Matt Higgins · Answer

@John Woodrich I might be dealing with the wrong banks but I feel like my line of credits were pretty expensive to set up and they always want that money at least 100% collateralized.  Also, they have been pretty stringent on the 1 year agreements. What happens if you have a couple projects going and they call the money?  I don’t trust these local banks at all personally, especially considering most of them have changed hands over the last 10 years.  I have some properties fully paid for and I almost think the 30 year cash our refi is the way to go.  They can take the fees out of the loan if you want.  I say this fully aware that @John Woodrich knows more than me.  Just interested to hear his response especially considering the tough moves I want to make tomorrow morning.

Marc Winter · Answer

Keep your powder dry.  It's not a question of IF but of WHEN.  I like the LOC idea for picking up bargains.

Sean Williams · Answer

We are in the process of refinancing some of our rentals here in Louisville, KY due to the attractive interest rates in order to increase cash flow and pull out some funds to have available on sidelines in case some deals start popping up down the road. That way we can take advantage of things like some savvy folks did in 2008-2011. Not that I think we are necessarily headed for a recession, but sometimes perception is reality, especially with the way the media can portray things.

Amber Gonion · Answer

@Steve Gerten I agree with @John Woodrich we have heard about the recession for a couple of years.  There is no good time to buy if you want to see it that way.

The fact is there is a balancing act of factors prices, interest rates, rents, supply, economic, etc.  it doesn’t line up to have cheap rates and low prices and increasing rents one will always be off.  So my opinion is that the best time to buy is today, the more units you have for a longer period of time the more wealth you will attain.

If you are flipping or in it for five years or less there is more risk (5.5 years is an averages economic cycle) If you are buy and hold your value could go down for a few years then pop up and climb, but during those five years rents will increase, you will cash flow, services/repairs become cheaper, and all the time you are financed in cheap money paying low interest collecting equity each month from the rent paying the mortgage.

How much money will you lose waiting for the crash?  How much will you lose during crash waiting for it to end before buying?  When will you know it is over and safe to buy?  People that bought in 2008 are back to value and increasing while collecting cash flow and gaining equity.   Diversify your investments for sure during all cycles, but don’t hesitate to buy real estate at any point in the cycle unless you are exiting within 5 years.

John Woodrich · Answer

The hot topic seems to be when the recession is going to hit and this has been going for a few years now...  Still isn't here.  The one thing that seems constant is that when money is cheap, there are no deals.  When money is hard to find, there are deals in RE.  We were "lucky" to get going back in 2007-2008 however we were buying houses when everyone said that is a horrible idea.  It wasn't luck, it was a calculated risk.

I have been telling my clients the last 2 years to get a LOC so they have money available if something comes up or if prices start to drop.  With a LOC they don't have to go through the costs of a refi and aren't paying interest on cash they don't need.  In many cases the bank will even eat the appraisal costs.  With rates very low I still recommend this as the best approach.

For someone with a fire to grow, a reverse 1031 is more feasible in this market as many want to sell at current prices but they don't want to purchase.  This gives you the option of finding a deal you want, then selling your current property via 1031 exchange so you pay no tax.