Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer

[Daniel K.]

During the pandemic, I bought a 3-unit house hack on the north side of Chicago for $580k with a 10% down portfolio loan through a local credit union. I renovated it, moved out, and it's since been a great investment, now cash flowing significantly with a 3.625% 30 yr FRM. Earlier this week, I got an email from the credit union holding the loan with an unexpected offer. They are willing to allow me to cash out refinance the property with a 30 yr FRM at 5% at up to 90% LTV. A recent comp sold that leads me to believe a reasonable valuation for the property of $800k. My loan balance is about $485k. These terms sound almost too good to be true, the catch being that I need to replace my rate with one nearly 140 bps higher (which is still significantly below market).

Were I to refinance at 90% LTV, my cash flow would evaporate entirely, and I might be slightly cash flow negative until next year when I can raise my below-market tenants’ rents to market, at which point I’ll be modestly cash flow positive again. But at the same time, I will have $235k tax-free in my bank account to put towards another deal which I intend to be cash flow positive. That same amount of money would probably take 10 years to earn via cash flow, and even then I’d have to pay tax on it.

What are the risks of taking this offer and leveraging up again? 140 bps interest rate increase doesn't seem all that bad. I know home values have been softening across the country, thankfully Chicago still seems to be going strong (at least for right now). Should interest rates drop below 5% for conventional mortgages, I know I can't refinance down if my LTV is too low, but other than that? Thanks.

[Ned Carey]

You have to run the numbers and compare what is the cost of the money vs what is the return on that borrowed money. The math is easy. Deciding what number to plug in for growth in rents and values is the hard part. it is as much art as science. 

In general the ability to borrow at 5% sounds like a great opportunity.  Keep in mind rates are not high now. They are typical for the long term. 5% is well below the long term avg for investor rates