Investor · Durham, NC · Member since 2016 · 14 posts · 6 votes
I'm in the process of refinancing an investment property I have owned for 3 years. The value has gone up significantly and I'm about to get a better rate too. I'm considering taking the max out that the LTV of 75% allows. I'll get more cash at closing to use for other deals, and to invest in general, but if I take out the max I'll also be about $100 short each month.
If rents continue to climb they way they have been here, and interest rates go up again, having that money at 3.5% and then only waiting a year or so to break even again seems appealing to me.
Obviously I could take out less and have a LTV of 65 or 70% but the point of this refinance was to lock in some of those gains, and get cash at a low rate for other investments.
Right! When I do a cash out refinance, I shoot for 75% but also require that the property make at least a bit of positive cash flow ($150-$250 per month) just to build in a bit of conservatism. The extra 5% (or so) of equity being pulled out just isn’t worth “pushing it” in my opinion.
I'm in the process of refinancing an investment property I have owned for 3 years. The value has gone up significantly and I'm about to get a better rate too. I'm considering taking the max out that the LTV of 75% allows. I'll get more cash at closing to use for other deals, and to invest in general, but if I take out the max I'll also be about $100 short each month.
If rents continue to climb they way they have been here, and interest rates go up again, having that money at 3.5% and then only waiting a year or so to break even again seems appealing to me.
Obviously I could take out less and have a LTV of 65 or 70% but the point of this refinance was to lock in some of those gains, and get cash at a low rate for other investments.
Would you do it? Why/why not?
I am pretty surprised you are being offered 3.5% on a cash out refinance on an investment property. Owner occupied rates have been higher than that. Investment and cash-out both put on a rate adder so I would expect you to be more in the 4.5 to 5% range. Are you paying points or is this not a conventional fixed rate mortgage?
If you are not paying points or there isn't some other catch here, I would lock that in and take maximum cash out. Of course only do that if you plan to deploy the cash on another investment.
NEgative CF is never a good idea. Refinancing isn't free money. Add the cost of the negative CF to the cost per month of the refi money and that's what that money costs you.
You said you would be getting a lower rate, but the impact of negative CF is just like giving that lower rate away and taking the higher one instead...and losing any CF in the process too.
If it were me, I wouldnt do it. But if the numbers make sense, go for it. For example, if you can use it to buy a property outright that cash flows 400+ you might take the chance. But if it only cash flows 200, then youre really down to 100 after the hit from the refi. that leaves only 1200 in cash flow for the year, so if something major needs repairs, you might find yourself in the negative for the year. Now, if you can use that money to spread out as down payments across a couple of properties that cash flow 200 or more each, then it might make sense. It's really a matter of your risk aversion. Just my two cents. Good luck!
to me it depends on how you deploy that additional capital. if you were clearing 300 per month on your current property, and if a cashout refi puts that place into negative cf territory, your new income property investment must compensate for that loss. meaning, will you now clear 500 per month (600 on the new place and the 100 loss on your current). every time you invest, you need to be sure you current total income stream is increasing. 2 properties is usually better than 1 as long as the 2 combined bring in more than the 1.
@Martin T. If you know what you're doing, and can afford the risk, negative cashflow isn't always a bad thing. You said the property is appreciating, and your renter is paying down the principal on your loan every month. The problem people get into is when they aren't being realistic with what they can afford or what expenses will be like.
Right! When I do a cash out refinance, I shoot for 75% but also require that the property make at least a bit of positive cash flow ($150-$250 per month) just to build in a bit of conservatism. The extra 5% (or so) of equity being pulled out just isn’t worth “pushing it” in my opinion.