I recently purchased my first rental in June. I used the BRRR method as I found on BP. I got a great deal paying cash by taking out a Home Equitly Line of Credit on my current home. Now im looking at refinancing the rental home and paying off the HELC. Ive done all the paperwork for the mortgage on the rental and find the closeing cost are $4000. I cant see this as a good investment strategy as I've now paid for closing costs on the original purchase, and now am looking at $4000 to get a mortgage on the home. I plan to shop around as I don't feel this is a good deal. I would like to get a mortgage on the house as the HELC is a fluctuating line of credit at prime +1 and would prefer a 30 year mortgage. Is there any advice for a newbie, I don't think Ive made a bad investment with my current cashflow, but refinancing this home would wipe out all my prfits for the 3/4 of the year.
Thanks in advance,
What's the value of the property and the amount of the loan you are seeking?
Yep - most kinda sidestep that little cost issue with BRRRR or slapping a blanket loan on a portfolio strategy. Equity harvesting or whatever. It's kind of like the after 'surprise' when you flip. What do you mean the IRS and the realtors made more than I did?
The hassles and fees of doing this need to be factored in. Would still be interested in hearing about the details @David Hendry . Thanks for posting!
You answered your own question--shop around, especially if you're not on a deadline and you've got positive cash flow.
$4k closing cost is about right for a hard-money loan, but if you can go with a conventional commercial lender, I think you should be able to beat that rate and find a deal closer to what you need. A commercial loan will be a basis point or two higher than a residential mortgage, will be amortized for 20-25 years, and will have a 5-7 year balloon or readjustment.
One other point about "profits" on a rental. I measure my rentals based on my annual ROI.
annual net cash flow + market appreciation + tax depreciation + debt reduction (paid by the tenant) divide by my total investment
Thanks for your responses Steve and Steve. Charlie in answer to your question, I purchased the property for 49,000. I owe 42,000 and its worth 53,000. Im asking 35,000 for refinance.
@David Hendry I would check with a smaller, local bank or CU. They often keep these in their portfolio. My last one didn't have an origination fee. It was a commercial loan. Good luck!
If you are pulling out the equity to acquire another cash flowing property, that will increase your profits, then additional financing costs would be justified.
THANKS @steve Vaughan
@Steve McCondichie why do you include tax depreciation in your ROI calculation?
You're allowed to deduct depreciation of your rental properties on tax returns, which lowers your overall tax liability, increasing your return.
@Steve McCondichie yes but you can deduct many items for taxes. if you want to value the tax shield that deductions provide you would only include the deductions times your marginal tax rate in the equation.