Cash Out Refi or Hold the current Loan?

Question

Hello community, I'm looking for a little advice. I just moved in tenants at my first rental prop. Its generating about $500 cashflow after mortgage, mat, and vacancy. I purchased the house as a foreclosure so after a few repairs I should have a really nice amount of equity. I was wanting to move foward with the Brrrr strat but I'm hesitant thinking if i refi to a bigger loan won't it kill the cashflow Im getting. Should I just stay with my current loan or am I looking at it wrong.

Oh and the loan is a conventional with a local bank as a second home 3.35% interst rate if that info makes a difference.

Thanks Beforehand for any advice.

Oh and the loan is a conventional with a local bank as a second home 3.35% interst rate if that info makes a difference.

Thanks Beforehand for any advice.

Joe Villeneuve · Answer

Go through these steps to find your answer:

1 - Find out exactly how much of a loan you can get when you refi.2 - Subtract the existing balance from your current loan, and the closing costs for this new loan, from this amount.  This gives you how much cash you will walk away with.3 - Now, assuming the new loan pmt will be higher than your existing, subtract your existing monthly payment from the new monthly pmt.  This is how much your CF will drop per month.4 - Multiply this number times 12 to give you your CF drop per year.Here comes your answer...5 - Divide the number from Step #2 by the number from Step #4.  This is how many years of CF you will be getting up front if your refi...or, another way of looking at this number is this number is how many years it would take you to get the cash you would have gotten in a refi from your CF if you didn't refi.

Keep in mind that that loss of CF is permanent, and continuous from the time you refi forward.  The refi cash you get is a one time occurrence.  So if the number you get in Step #5 is small, and by small in my opinion I mean anything less than 8 years, it's not worth the refi.  I will lose you too much money.

Joe Villeneuve · Answer

It all depends on how much CF you end up losing, and how much cash you are able to pull out of a refi.  You can't base your decision on what ifs.  You need to know the actual numbers you would get as a result of a refi before any decision can be made.

Trevar James · Answer

Thank you for the info. Yes it includes PITI and Taxes. Thats true the more i read through the comments the more I realize its too early in the movement to be so suck on the cash flow. More doors is the goal for now.

Trevar James · Answer

Thank you to all. It is all great advice. I am still thinking from a home owners perspective and not an investors. Just like when buying the deal I will let the refi numbers dictate if the Refi is worth it or not. Now if some how i can get tge landlord policy to be lower than the current homeowners policy im switching out of it would really be worth a refi. Any thoughts on getting low landlord insurance?

Steve Vaughan · Answer

If looking to expand AND another acquisition at a good price is feasible, my general stress test is

1. Cost of capital = 7% or less.  All loan costs can't be more than 7% of the net cash out I receive. PITA, hassles, indigestion of obtaining another loan also a consideration.

2. New loan rate same good terms but not more than .5% higher rate.

If these are a go I make sure my loss in cf on deal 1 is more than covered by my new acquisition.

Hoi L. · Answer

Congratulations on your first REI property!  Since you are in the acquisition phase of your REI, concentrate on acquiring more capital in order to continue buying more properties.  However, you need to refinance at a rate to ensure continual +cash flow.  May not be $500/door, but $100/door after cap-ex, vac, R&M, etc, is the way to go.

The BiggerPockets calculator is useful to give you a ballpark range in the next property.

Jake Wiley · Answer

The game is all about cash flow.    You should do another deal if the refi and the additional property improves the cash flow globally.     The BRRRR strategy only becomes an infinite game if you follow this rule.

Katherine Blazer · Answer

I think it depends on where you are at in your investing plan. Do you need an extra $100 or $200 to leave on... or would the equity you have built in your rental be better used buying another property that could make up that cash flow? It just depends. There isn't a right or wrong answer; you own your first property!

Cash Out Refi or Hold the current Loan?

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