Should I cash out in this environment? 43% CoC to 115% CoC!

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Should I cash out in this environment? 43% CoC to 115% CoC!

Cameron Lam
Gilbert, AZ · Member since 2019 · 106 posts · 604 votes

Hi guys!

I'm partnered up in a duplex that has joint title with me and my partner out in Phoenix, AZ.  Our original numbers were as follows.

Original Numbers

-$309K Purchase Price at 4.875% 30 year fixed

-$278K Loan Amount

-$43K Initial Investment

-$15.7K Annual cash flow or 38% CoC (15.7K/43K)

My partner was able to lock in a killer interest rate a couple of weeks ago when the rates dipped and rolled in a few thousand into the loan amount here's where the numbers fall in that scenario.  He is going to refinance in his name only and free me up for another loan.

Refinance

-$309K Purchase Price at 3.375% 30 year fixed

-$281K Loan Amount

-$43K Initial Investment

-$18.5K Annual cash flow or 41% CoC (18.5K/43K)

Cash Out

-$309K Purchase Price at 3.375% 30 year fixed

-$311K Loan Amount

-$16K Initial Investment (Take out $26K of the initial $43K) 

-$16.9K Annual cash flow or 106% CoC (16.9K/15K)

Here's my dilemma! The appraisal for the property recently came back at $415K and my lender suggested that we could take up to 26K cash out for 75% LTV. We're currently at 68% LTV. The numbers would look insane with CoC at 106%. I've explained to my partner that we could both take out 13K each(half of 26K) and essentially have $16K total into the property versus the original $43K total. Not only would our CoC be insane, but it would give me access to some capital should I invest down the road in this market downturn or have some stashed away as extra reserves for vacancies or emergencies during the COVID-19 crisis. My partner does NOT want to do this and works in banking/lending so I'm trying to see his point of view.  Here are his main two reasons.

1.  Given the current scenario (he works in banking), he is bracing for the possibility of a reduced income up to 50% reduction(lack of bonuses or possible job transfer pay cut etc.  I'm sure everyone is bracing for this as its a real possibility).

2. Should he want to invest down the road and has to secure loans under his name only, he is fearful of adding on any more leverage. In this case his leverage in the property moves from $278K to $311K or an additional $33K. If his income is reduced significantly he wants to not add on any new debt so his DTI continues to look good.

After he explained his situation I understand where he's coming from but was curious if there is any other reason we shouldn't do the cash out refi? Even if I had to significantly reduce market rents, with higher CoC of 100+% we would be sitting pretty in the property. Also, an extra $30K of financing comes out to $2000 a year which I don't believe puts a dent really in any sort of Debt to Income calculations. I'm not old enough to have really felt the affects of the last crash but he was. Is there anything I'm missing here? Even if there was a fear of being underwater in this property and somehow the value plummeted from $415K to $300K we both agreed that we're in this for the long haul and don't intend/need to sell soon.  We could simply weather any downturns in value until the market gets hot again.  If we wait for the current environment to settle I feel like future appraisals won't be as high.

Thanks for reading this!

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Wes Blackwell
Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
6y

@Cameron Lam

I would listen to your banking friend in Phoenix on this one. I don't think the reward is worth the risk. Don't over-leverage when you don't have to. Plus if his name is going to be the only one on the loan then he certainly has the stronger say in this partnership. 

You guys have played it smart up to this point and had some amazing returns. Don't get greedy and potentially ruin a good partnership should things go south. Especially in a time where we have yet to see the full lasting effects of the virus. 

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  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    6y

    So your mortgage nut is almost $1500 pm, insurance must be another $100, and tenant pays all utilities and maintenance?  And your clearing an additional $1300 per month?  A place that only cost $309k and rents for $2900 per month with tenants paying all utilities is a dream!  These don’t happen all the time!

    0Reply
  • Maurice Smith
    Member since 2018 · 211 posts · 164 votes
    6y
    paid 369k for my 4 plex in las vegas last year around this time . collect $3225/month with a 290k note at about $1886 a month pti . After utilities Im cash flowing a little more then $1000.00/ month. I recently got an appraisal back at $430k , and was considering doing a cash out and put that money into another property. until this damn corona virus bs! now im reconsidering doing this because the vegas market right now is going through some real hard times ( just like any other service industry state). A lot of people are loosing there jobs due to the strip closing down and a lot of the major hotels and casinos and other local non essential business. I don't want to risk pulling money out and then the market taking a nose dive causing me to be upside down. I guess if you plan to hold for 10 plus years then everything should be ok. but that's easier said then done. Hopefully this is all just temporary and things go back to normal by the end of summer
    0Reply
  • Cameron Lam
    OP
    Gilbert, AZ · Member since 2019 · 106 posts · 604 votes
    6y
    Originally posted by @Mark H. Porter:

    So your mortgage nut is almost $1500 pm, insurance must be another $100, and tenant pays all utilities and maintenance?  And your clearing an additional $1300 per month?  A place that only cost $309k and rents for $2900 per month with tenants paying all utilities is a dream!  These don’t happen all the time!

     Hey Mark, yes this was a home run deal.  Mortgage is $1780 + 150 for repairs and 240 for insurance.  Yes my tenants pay the utilities and even most of the landscaping bill.

    0Reply
  • Cameron Lam
    OP
    Gilbert, AZ · Member since 2019 · 106 posts · 604 votes
    6y
    Originally posted by @Maurice Smith:

    paid 369k for my 4 plex in las vegas last year around this time . collect $3225/month with a 290k note at about $1886 a month pti . After utilities Im cash flowing a little more then $1000.00/ month. I recently got an appraisal back at $430k , and was considering doing a cash out and put that money into another property. until this damn corona virus bs! now im reconsidering doing this because the vegas market right now is going through some real hard times ( just like any other service industry state). A lot of people are loosing there jobs due to the strip closing down and a lot of the major hotels and casinos and other local non essential business. I don't want to risk pulling money out and then the market taking a nose dive causing me to be upside down. I guess if you plan to hold for 10 plus years then everything should be ok. but that's easier said then done. Hopefully this is all just temporary and things go back to normal by the end of summer

    And that's what I'm wondering.  Are you afraid of being upside because you're more levered in debt and if you have to cheapen rent to entice tenants to be there you might not cover your expenses?  How much were you considering taking out as a cash out? I'm thinking we only take out 26K which wouldn't be huge.

    0Reply
  • Maurice Smith
    Member since 2018 · 211 posts · 164 votes
    6y
    Originally posted by @Cameron Lam:
    Originally posted by @Maurice Smith:

    paid 369k for my 4 plex in las vegas last year around this time . collect $3225/month with a 290k note at about $1886 a month pti . After utilities Im cash flowing a little more then $1000.00/ month. I recently got an appraisal back at $430k , and was considering doing a cash out and put that money into another property. until this damn corona virus bs! now im reconsidering doing this because the vegas market right now is going through some real hard times ( just like any other service industry state). A lot of people are loosing there jobs due to the strip closing down and a lot of the major hotels and casinos and other local non essential business. I don't want to risk pulling money out and then the market taking a nose dive causing me to be upside down. I guess if you plan to hold for 10 plus years then everything should be ok. but that's easier said then done. Hopefully this is all just temporary and things go back to normal by the end of summer

    And that's what I'm wondering.  Are you afraid of being upside because you're more levered in debt and if you have to cheapen rent to entice tenants to be there you might not cover your expenses?  How much were you considering taking out as a cash out? I'm thinking we only take out 26K which wouldn't be huge.


    Im able to take out around 45-60k it will increase my debt from 290k to around maybe 340ish ( that's a guess) I still would be in the green, considering the value of the building. I would lose some cash flow due to my monthly payment being higher, but that's not a issue with me. the real issue I have is the uncertainty going on in this market. Its not so much fear its just that I would have a better piece of mind once the economy get back stabilized.
    0Reply
  • Cameron Lam
    OP
    Gilbert, AZ · Member since 2019 · 106 posts · 604 votes
    6y
    Originally posted by @Maurice Smith:
    Originally posted by @Cameron Lam:
    Originally posted by @Maurice Smith:

    paid 369k for my 4 plex in las vegas last year around this time . collect $3225/month with a 290k note at about $1886 a month pti . After utilities Im cash flowing a little more then $1000.00/ month. I recently got an appraisal back at $430k , and was considering doing a cash out and put that money into another property. until this damn corona virus bs! now im reconsidering doing this because the vegas market right now is going through some real hard times ( just like any other service industry state). A lot of people are loosing there jobs due to the strip closing down and a lot of the major hotels and casinos and other local non essential business. I don't want to risk pulling money out and then the market taking a nose dive causing me to be upside down. I guess if you plan to hold for 10 plus years then everything should be ok. but that's easier said then done. Hopefully this is all just temporary and things go back to normal by the end of summer


    And that's what I'm wondering.  Are you afraid of being upside because you're more levered in debt and if you have to cheapen rent to entice tenants to be there you might not cover your expenses?  How much were you considering taking out as a cash out? I'm thinking we only take out 26K which wouldn't be huge.



    Im able to take out around 45-60k it will increase my debt from 290k to around maybe 340ish ( that's a guess) I still would be in the green, considering the value of the building. I would lose some cash flow due to my monthly payment being higher, but that's not a issue with me. the real issue I have is the uncertainty going on in this market. Its not so much fear its just that I would have a better piece of mind once the economy get back stabilized.

    Do you have fear just in case you need to sell and owe more then the propertys worth? Should there be any fear if this is a long term play? 

    0Reply
  • Wes Blackwell
    Real Estate Agent · Phoenix, AZ · Member since 2016 · 738 posts · 1k+ votes
    6y

    @Cameron Lam

    I would listen to your banking friend in Phoenix on this one. I don't think the reward is worth the risk. Don't over-leverage when you don't have to. Plus if his name is going to be the only one on the loan then he certainly has the stronger say in this partnership. 

    You guys have played it smart up to this point and had some amazing returns. Don't get greedy and potentially ruin a good partnership should things go south. Especially in a time where we have yet to see the full lasting effects of the virus. 

    2Reply
  • Joseph CacciapagliaBusiness Member
    Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
    6y

    Your analysis is ignoring the return that you'll make on the money that you take out. If the CoC of that reinvestment is significantly below the 41% return of the rate and term refinance scenario, then your blended rate could be worse by taking cash out. You're essentially giving up a 41% return on the $26K, and probably putting that in a deal that will return less in the short run.

    Also, in general, the more aggressive partner should always defer to the more conservative one, imho. Otherwise, half your partnership won't sleep at night. If there is too wide a divide in your preferences, then it's time to find a new partner. In any case, 68% LTV isn't terribly conservative heading into a recession. Of course, 75% isn't that bad either.

    [email protected]979-218-2286
    Joseph Cacciapaglia powered by Morty
    WebsiteView Page
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  • Cameron Lam
    OP
    Gilbert, AZ · Member since 2019 · 106 posts · 604 votes
    6y
    Originally posted by @Joseph Cacciapaglia:

    Your analysis is ignoring the return that you'll make on the money that you take out. If the CoC of that reinvestment is significantly below the 41% return of the rate and term refinance scenario, then your blended rate could be worse by taking cash out. You're essentially giving up a 41% return on the $26K, and probably putting that in a deal that will return less in the short run.

    Also, in general, the more aggressive partner should always defer to the more conservative one, imho. Otherwise, half your partnership won't sleep at night. If there is too wide a divide in your preferences, then it's time to find a new partner. In any case, 68% LTV isn't terribly conservative heading into a recession. Of course, 75% isn't that bad either.

    Joseph I honestly didn't think about that and that's a great way to think.  The way I was justifying this was our cashflow now is $1300/mo at 4.875 % and with the cashout refi of $26K we'd be cashflowing $1400/mo and be getting money in our pockets.  Yes I mentioned to him since he is bearing the risk with the loan in his name we would follow his lead but just trying to wrap my head around being overleveraged.  Isn't leverage great if your cash flow is high and you are buy and hold long term to weather the market storms?

    0Reply
  • Joseph CacciapagliaBusiness Member
    Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
    6y
    Originally posted by @Cameron Lam:
    Originally posted by @Joseph Cacciapaglia:

    Your analysis is ignoring the return that you'll make on the money that you take out. If the CoC of that reinvestment is significantly below the 41% return of the rate and term refinance scenario, then your blended rate could be worse by taking cash out. You're essentially giving up a 41% return on the $26K, and probably putting that in a deal that will return less in the short run.

    Also, in general, the more aggressive partner should always defer to the more conservative one, imho. Otherwise, half your partnership won't sleep at night. If there is too wide a divide in your preferences, then it's time to find a new partner. In any case, 68% LTV isn't terribly conservative heading into a recession. Of course, 75% isn't that bad either.

    Joseph I honestly didn't think about that and that's a great way to think.  The way I was justifying this was our cashflow now is $1300/mo at 4.875 % and with the cashout refi of $26K we'd be cashflowing $1400/mo and be getting money in our pockets.  Yes I mentioned to him since he is bearing the risk with the loan in his name we would follow his lead but just trying to wrap my head around being overleveraged.  Isn't leverage great if your cash flow is high and you are buy and hold long term to weather the market storms?

    Leverage isn't good or bad. It just magnifies your underlying results. When your properties are performing well, leverage is amazing, but when rents or prices fall drastically, not so much. You also have to remember that cash flow isn't static. It can grow or shrink over time. Don't get me wrong, I personally would feel relatively comfortable in the cash out scenario that you described. However, I know plenty of old school investors that never lever past 65% LTV, and even some that only buy in cash. These are usually guys that have been through several downturns, and that's the level they've decided is appropriate. It's really just a matter of your risk preference.

    [email protected]979-218-2286
    Joseph Cacciapaglia powered by Morty
    WebsiteView Page
    0Reply
  • Wayne Marques
    Member since 2020 · 1 post · 0 votes
    6y

    I believe that your concern about being over-leveraged is a legitimate concern given all of the uncertainty now and in the near future.  Having the ability to adjust rents to keep your property occupied shouldn't be overlooked.  

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