I am debating on cashing out some equity to buy more properties or sell to leverage up. I would like to keep all of the properties and leverage as much as I can with refinancing but do not know what it would do to the 50% rule??
If you have a property that meetss the 50% rule and refinance it to buy another cash-flowing 50% property, is this a good financial option? This would mean that the first property would no longer meet the 50% rule but still cashflow a small amount after expenses.
What do you guys think of this situation? What would you seasoned investors do?
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
The "50% rule" is independent of financing. It simply says that over time and multiple properties operating expenses plus capital items plus vacancy will average about 50% of the gross scheduled rent. That's independent of any debt service.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
17y
Ken,
To answer the other part of your question, pulling equity out to make another investment/purchase is certainly the right thing to do so long as you buy within your means and correctly to fit your strategy.
Having a second or third or 100th property gives you more tax deductions, more properties to appreciate (both market and forced), and gives you more doors to better your occupancy ratio. What I mean by that is if you have just one or two properties, and a tenant moves out, you are now 100% vacant and 50% vacant respectively. If you had 10 doors and one moved out, you are at 90% total occupancy.
What is better, cash out refi to make a purchase or sell and buy another? Answer - DEPENDS. What is your strategy? ARe you attempting to build a landlording business which will make money from cash flow? If so, then selling the one to buy another somewhat defeats the purpose (assuming your first property is a good one and cash flows - if not, you might consider selling and cutting your losses on that one).
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y
I would not take out more during the refi than would allow the original property to still cash flow $100 per unit per month. After all, if you take out so much that the original property doesn't perform, you've defeated the entire purpose of owning rental property - assuming of course your goal is to make money!!!
Real Estate Investor · ten mile, TN · Member since 2009 · 1k+ posts · 374 votes
17y
If it does not meet the 50% rule, I would question wheather or not it really does cash flow.
If you leverage too much relying upon others to pay your leverage for you then you will find a time that an unexpected expense will sink you. This was basically the first domino that fell in the current credit crunch.
This is what the 50% rule does for you. You basically want to put 50% of the rent away into an account from which all repairs will come from. It may look like you have excess in this account from time to time but when those unexpected repairs hit, you will have it already set aside and it will not derail you.
The other 50% minus the financing is what leaves you cash flow to play with.