How to get to the next property

Question

Hi a few months ago my sister and I found a private lender who gave us a 5% interest rate granted we put 30% down on the property and pay it off in 7 years. We fixed it up some and now I estimate we have about 40% equity. With the current loan terms we are cash flowing -120 each month due to the 7 year pay off period. Should we refinance or push through given the good interest rate?  My sister and I both have good full time jobs and can support. However, I'd like to find another deal. Would it be a bad idea to refinance and put that money to the next deal which we would BRRRR? I told the private lender of my idea to refinance and pay him back immediately and then take out a new loan with him for the next deal. However his response was for us to just keep this existing loan and put our refi money to the next deal. What are your thoughts, is one option better than the other? Thank you in advance!

Dominic Mazzarella · Answer

If you’re comfortable with the monthly cash flow hit and your goal is to scale, pulling that equity out and putting it into a BRRRR deal might make a lot of sense, especially if you’re confident you can force appreciation and refi again later. The lender’s suggestion to keep the existing loan and just use your refi money on the next deal isn’t a bad idea either, since it preserves a good rate and avoids a reset. Really just comes down to your risk tolerance and how aggressively you want to grow.

Vaughn Smith · Answer

@Jacob Krum Where is the property? Can you provide more details on the property? You may have a few options here dependent on value and location but I'd need more to be able to assist

Ko Kashiwagi · Answer

Hi Jacob,

If you have a deal that you can make more money (despite the higher cost) then it's worth it. Otherwise, you could wait on it until you find that homerun deal.

Brandon Croucier · Answer

Hi Jacob,

Ultimately this is a decision you need to make.

Essentially it comes down to,

Can you make more money with the equity you pull than what the increased interest will cost you?

It looks like this is a fully amortized 7 year loan meaning, regardless of the interest payments, you are paying the property off at the rate which is similar to an automobile loan. If your goal is building equity, this is great but if its to create cashflow & use the extra income to reinvest this might not be the best loan for you.

Real Estate has appreciated 4-5% per year over the last 30 years, not including cash on cash returns. If you were to use longer term debt, acquire more properties while freeing up cashflow, there is a good probability of increasing returns.

Chris Seveney · Answer

I would keep your current rate if its working for you. The only thing I would say is if you refinance what are you doing with the money? If you have a grand slam deal then yeah refinance but do not refinance just to refinance - refinance when you have an opportunity.

Chris Seveney · Answer

if you have a good realationship with the private lender you could use that property as secondary collateral.

Jacob Krum · Answer

Thanks for the advice Chris. That was my initial thought but the issue is that it takes about a month to refinance, correct? So if I find a grand slam deal, I would not be able to snag it right away with cash as I would need to wait until the refi goes through.

Jacob Krum · Answer

Hi Erik, it is a fully amortizing loan.

Erik Estrada · Answer

Is there a ballon at the end of the term? Or is this a fully amortizing loan?

How to get to the next property

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