Good Morning. I'm new in here and eager to grow my portfolio. This may be a longer post, but here is my situation. I currently am renting out a single family home that I previously lived in. When I moved out and into my current home, I refinanced he first home to pull out cash needed for down payment on new home. When I did, I cut that loan down to 15 yr mortgage, which has basically 13 yrs left. In my current market, I can sell it profit $100k. I am not cash flowing but under $200 on rental side. Should I sell it and take profits to invest in other property/ new home for family, or should I just keep it and let it be paid for in 13 yrs? Then I would have a cash flow of $1600+ and a paid for home (which could be sold for my 3yr old's college). I am torn on what is the best plan of action. Or should I refinance again back out to a 30 yr mortgage to increase cash flow on rent now?
Hey @Adam Wells , you have a few great options here and no wrong answers. I think you should first figure out what your financial goals are and that might help you figure out what direction you want to go. I am always a fan of having more properties instead of having more cash flow now. I think you should try and purchase another property somehow. That might be refinancing and taking to proceeds to purchase another property or selling the first one and buying two. While you might now cash flow as much right now from another property, in 5 years, you will have generated a lot more wealth from the debt paydown alone.
Yes, get another property. On your current path, in 13 years you will have no properties and a son in college. That's very noble and honorable of you but is it smart? Nope....
Start putting away $$ monthly and in 13 years you will have enough to pay for a basic college education...anything more than that, let him figure that out. I come from the 'college is highly over-rated' school of thought....
Refi into a 30 year loan and use the equity to reinvest. 15 year loans are not good if you are trying to cashflow. If you want to pay down properties quicker then leave it. Personally I would rather have a longer loan term and pay down properties 4-5 years down the road
@Adam Wells what is the current market value of the home?
$225k in a market where things are selling in 1 day and there are bidding wars. Could get close to $240k. I only owe $125k.
It depends on your long-term goals. Most folks that I talk to who are long-term buy and hold investors, lament the properties they sold. As others have mentioned, look at refinancing to generate cash flow if you plan on keeping this property for more than a few years.
Cash out Refi into a 30yr fixed and buy another one- then do it again once you have another down payment plus closing costs saved up.
I’m in the “max leverage and keep buying til you obtain your freedom number in cashflow crowd.”
Others have said it, talk to a lender or two about cash out refi options, or get a HELOC. Depending on how your house would cash flow with the 15 year mortgage a heloc is typically much cheaper to get done. In the NW area many small regional banks will get them done for very little closing costs, practically free if you already do you banking with them. You would just have to compare both options and see what gets you the most cash. then go shopping.
@Justin V. The max leverage game works great until the disco ball stops, then.......
How would you advise protecting against this theoretical death of disco?
:-) my apologies, I am not doom and gloom about the current market by any means.
What I should have said is the market goes in cycles, start researching the 80's and work your way until now. We are in very great times in the current business and RE cycles, thought the last 30 years alone tells us that won't last forever. How the market corrects, that is anyone's guess. As you know, there are plenty of people predicting what's going to happen. Though, that is way above my pay grade!
My thinking is RE and true wealth building is a long term strategy. Going into deals at this stage of the RE cycle with max leverage can be risky if the market cools, or price drop even a little. And on the flip side, it can be incredibly rewarding. That is a personal preference on your risk tolerance. Be aware of the upside and the downside.
My thought is be conservative and honest about your initial underwriting and go into a deal with the leverage that will give you wiggle room in your monthly cash flow to handle any unforeseen issues, economically, or normal things that come up in day to day operations.
For example, to my knowledge going into 2008/2009 if you had at least 15% equity in your deal, you were able to sustain and make it through the worst of that market cycle.
And, I'm sure you know all this. Fun topic!
Fair and thank you for the additional details.
I misrepresented myself: I’m in the “get long term fixed low interest rate loans to get properties, making sure there’s good cashflow and a nice cash on cash return percentage” group. ;)
@Justin V. Awesome! :-)
@Adam Wells I had your situation a few years ago.... 15 year mortgage plus HELOC taken out when house was our primary residence. Property always ran at a monthly loss. HELOC was going into repayment last year, so I did a refi of first mortgage and HELOC into a lower 30-year mortgage to get positive cash flow. Wish I had done that sooner...
Just my 2 cents.
My two cents would be to either refi this property into a 30yr mortgage so you have positive CF or to sell this property and try to buy 2+ houses that will CF. @Devin Creek was alluding to was you do not want to me maxed out in terms of leverage. Having debt is a great thing and a great way to build wealth but that is only true if you have positive CF. You are gambling when you buy a property that is costing you money every month to own it and your banking on appreciation. If your job situation changes, market changes etc you will be in a tough situation.
Example I assume when you say you are losing $200/mo that probably is not accounting for CapEx needed for the building, a month that may have one or two extra maintenance calls etc. Even at those numbers you are losing $2400/yr which means you need 1% appreciation to "break even". Which is all well and good unless there is some type of market correction and you need to sell the house. What if you have to change jobs, get laid off etc. and you have a $200+ expense every single month outside of your personal home and expenses?
Obviously all of these are what if situations but you do not want to buy or own anything that is a liability (a liability is something that takes money out of your pocket). You want to own INCOME producing assets.
@Nick Robinson Well said. Totally agree.
@Adam Wells And really what is honestly the most likely scenario is not some crazy economic factor or really even a major life or job change, it is the day to day operations and something going wrong at your rental. Personal example: Tenant calls about a dryer issue, every time we call our appliance repair people to come out, it seems like no mater what the issue is it is $400-500 bucks. Well, even at 200 bucks a month in positive cash flow that is two months worth, so to Nick's point if you add that on to a job or live change, it can start to hurt. stuff happens!
@Adam Wells you have transaction inefficiencies when you sell (ie commission, taxes, etc), so if your goal is long term hold then it seems like a cash out refi to 30 yrs is a good option.
@Nick Robinson I think you may have misread my original message. I am in a positive cash flow situation, it is under the $200, more like $160. I basically feel like I am breaking even except for fact it will be paid off in 13 yrs and can cash over $1600.
Thanks for all the feed back guys. This is my first post and I am feeling the love from the community. Great information. I am leaning on the 30 year refi right now. Might just do 20 if numbers for cash flow is still where I want to be. It def is on he 30 yr.
@Adam Wells Your in a great spot then. Definitely talk to a lender. These days $300-400 in positive cash flow is pretty typical for a SFR. Generally what people are suggesting is do a 30 year cash out refi at 75-80% LTV. This would accomplish a couple goals, lower monthly PI payment, and allow you to pull out a good chunk of cash to go buy another place that should also have 300+ in positive cash flow. Sense you are converting your house into an investment, really no reason to have a lower amortization and higher PI payment because you can take your money and make it work harder for you in another property, while having a conservative amount of equity left in the deal.
@Bruce Woodruff: Amen to the "college is highly over rated" comment. My college-educated daughters now realize that real estate investing is a better career path than their chosen professions. Learning from Mom and Dad.
If you are cash flow positive every month I would extend the loan to 30yrs and take out as much money as I could to have a positive cash flow monthly of $250ish. Then I would find somewhere to stick that money. Make sure you have a reserve fund for the building for when expenses come up. I would pull as much money as possible from the property while still cash flowing. Think about it this way they are giving you a 3% loan and inflation is 5.4%. So if your tenants are paying back the loan, and you have a decent positive cash flow, you are getting paid to borrow that money. Even if inflation goes "back down" to their target of 2.5%, which is obviously manipulated.