Cash Out Refinance Nightmare, Help Me Make Sense of It

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Cash Out Refinance Nightmare, Help Me Make Sense of It

Paul O'Connor
Member since 2019 · 35 posts · 9 votes

Ok, so a little bit of backstory. I have 5 rental SFHs that I'm trying to get refinanced to do a way after the fact BRRRR. (Sorry, I discovered Brandon Turner and BiggerPockets well after I had purchased most of these)

The houses are all owned outright, all of them are currently rented, with paying tenants. I wish I could upload my spreadsheet that I created, to show you the numbers more easily.

So... here are the current monthly numbers (remember, these houses are owned, free and clear, no mortgage). 

Rent: $6,175 (from all 5 houses combined)

Expenses: $2,906.31 (Property taxes, property insurance, umbrella insurance, vacancy (8.33%), and maintenance (16.66%))

Profit: $3,268.69 

So... here are what the numbers are after the refinance. 

Rent: $6,175

Expenses: $7,159.44 (above listed expenses, mortgage then $12,500 in yearly flood insurance and closing costs divided by 360 months)

Profit: -$984.44 (no profit, it's a negative $984.44 per month)

Net Cash Out from Refinance: $560,087.63

Interest Rate: 4.00%

I'm doing 75% LTV loans, and closing costs for the 5 houses is $58,511.79 (this number includes points). What screws me is the flood insurance that the lender is requiring me to obtain on 4 of the houses. Average cost is $3,124.85/yr between the 4 houses (totaling $12,499.41). That's what crushes the deal in my eyes and drives me into negative cash flow.


I feel like I'm missing something from a certain angle that I'm not taking into account or there is an aspect that I'm missing. I just wanna cut my losses not ($2,233 already paid for flood insurance, surveys, and elevation certificate) and walk away from the loan. 

Would you go through with these loan? Do these numbers work for you? If yes, please explain. What I'm looking for, is a reason not to cancel the loans. 


Thank you for your help!

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
5y

I don't love the term profit or loss in this context. This number is NOI (net operating income) after debt service. You are encumbering the properties with debt that exceeds purchase price. That negative cash flow each month is actually part of the cost to borrow $560,097.

The real question is what do you plan to do with the $560,097 cash out? I assume buy more properties, so that means you can expect additional income. Let's say for simplicity that you put the $560,097 in a dividend stock that yielded 6%. That money would make $33,605 each year or $2800 per month. If you can deploy that cash in a higher yield investment, the number just gets bigger. 

Just be little careful, because your change in cash flow may have no effect on your taxes. That means you can realize a cash flow loss, but have taxable income. The interest expense from cash out refinance cannot be claimed against the property you took the cash against (if it goes over purchase value). IRS rules dictate that deductibility follows use. The interest from the cash out portion can be deductible against a new purchase, so you want to redeploy that cash. Make sure you keep the money separate and do not use anything for personal use (buying a car, vacation, personal home, etc.) You want to be able to trace every penny and track your interest accordingly. Talk to your accountant about this to avoid an audit surprise.

This is the part of BRRRR that nobody talks about; in most cases you are leveraging over your purchase price and it often results in negative cash flow. That doesn't mean it is a bad idea, but it does mean you need to redeploy that cash into other investments that produce more income.

I would only go through with the loan if I had plans to invest the cash out money. 

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  • Tony Gorokhovsky
    Real Estate Investor · Brooklyn, NY · Member since 2017 · 65 posts · 39 votes
    5y

    @Paul O'Connor

    Is this refinance a commercial loan? If so then you need to keep in mind it’s most likely in a 5 year lock and then it adjusts to market in year 6. Interest rates will go up and your going to be in an even worse spot.

    General rule of refi is you want to make sure your covering all expenses and still having a small cash flow. I would definitely consider lowering your burrow amount to make the numbers make sense.

    Good luck!

    0Reply
  • Jeff Wydra
    Rental Property Investor · Montréal, QC Canada · Member since 2019 · 28 posts · 17 votes
    5y

    @Paul O'Connor as I was reading through this post these were the three options I was thinking all along as well. Maybe the only other option I can think of would be offering your tenants a rent to own option? It would net you more cash flow and eventually get these off the books. Might be an option, might not. Thought I'd throw it out there.

    1Reply
  • Paul O'Connor
    OP
    Member since 2019 · 35 posts · 9 votes
    5y
    Originally posted by @Tony Gorokhovsky:

    @Paul O'Connor

    Is this refinance a commercial loan? If so then you need to keep in mind it’s most likely in a 5 year lock and then it adjusts to market in year 6. Interest rates will go up and your going to be in an even worse spot.

    General rule of refi is you want to make sure your covering all expenses and still having a small cash flow. I would definitely consider lowering your burrow amount to make the numbers make sense.

    Good luck!

    No, it'd be 5 residential loans. I just cancelled the loans... the flood insurance is just out of control.

    0Reply
  • Paul O'Connor
    OP
    Member since 2019 · 35 posts · 9 votes
    5y
    Originally posted by @Susan Maneck:
    Originally posted by @Paul O'Connor:
    Originally posted by @Joe Norman:

    As suggested above you could not borrow as much to keep your payment down and your profit up. Another thought is to leverage your equity with a HELOC - maybe you can find a lender who will do one of them without flood insurance. Good luck!

     I reached out to every lender in the area and was told the same thing. None of them will do HELOCs on investment properties. I was told them wouldn't do commercial loans on residential properties and they wouldn't do residential loans on investment properties. I've had a lot of trouble even finding a lender, until I reached out to mortgage brokers. 

    Wells Fargo will do HELOCs on rental properties but they require flood insurance as well. However, I've been able to keep my interest rates well below 4% and the only closing cost on those is the appraisal. They are what I use for BRRR.

    The local Wells Fargo branch that I reached out to, would NOT do a HELOC on the houses. I reached out to every bank, credit union, or other financial institutions within 20 miles... none of their loan officers were willing to help me. No one even suggested alternatives, they were quite useless in my search. I wish I had a relationship like yours with a local lender near me. I have great credit and plenty of income... that's why it was so baffling to me that no one would help me. And I'm also a very nice person, so it's not like I had an attitude on the phone with them, making them not want to deal with me.

    0Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    5y
    Originally posted by @Jay Hinrichs:
    Originally posted by @Brian Brown:

    @Jay Hinrichs - Hi Jay if an LLC is easily pierced why create one for a single member or husband wife investing business. How do you legally protect yourself or partners.

    to protect credit ( personal credit) IE utlities etc..  for lawsuits not going to help much 

    LLCs are something newbies are crazy about. The highly experienced guys like Jay seem more unimpressed by having properties in LLCs. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Eric James:
    Originally posted by @Jay Hinrichs:
    Originally posted by @Brian Brown:

    @Jay Hinrichs - Hi Jay if an LLC is easily pierced why create one for a single member or husband wife investing business. How do you legally protect yourself or partners.

    to protect credit ( personal credit) IE utlities etc..  for lawsuits not going to help much 

    LLCs are something newbies are crazy about. The highly experienced guys like Jay seem more unimpressed by having properties in LLCs. 

    I have many LLC's but for different reasons and if they are single member closely held they offer little to no asset protection..

    but if you have un related and arms length members there is limited liablity for those members.. 

    Podcast Guest on Show #222
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    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    5y
    Originally posted by @Paul O'Connor:

    The local Wells Fargo branch that I reached out to, would NOT do a HELOC on the houses.

    I reached out to every bank, credit union, or other financial institutions within 20 miles... none of their loan officers were willing to help me. No one even suggested alternatives, they were quite useless in my search. I wish I had a relationship like yours with a local lender near me. I have great credit and plenty of income... that's why it was so baffling to me that no one would help me. And I'm also a very nice person, so it's not like I had an attitude on the phone with them, making them not want to deal with me.

    Actually, I did not use a local WF branch, I applied online. Did you try and do all those houses at once? I've only applied for them one at a time. You do have to have owned them at least one year before you apply. 

    0Reply
  • Paul O'Connor
    OP
    Member since 2019 · 35 posts · 9 votes
    5y
    Originally posted by @Jeff Wydra:

    @Paul O'Connor as I was reading through this post these were the three options I was thinking all along as well. Maybe the only other option I can think of would be offering your tenants a rent to own option? It would net you more cash flow and eventually get these off the books. Might be an option, might not. Thought I'd throw it out there.

    That's not a bad idea... it's definitely an option worth considering.

    0Reply
  • Paul O'Connor
    OP
    Member since 2019 · 35 posts · 9 votes
    5y
    Originally posted by @Susan Maneck:
    Originally posted by @Paul O'Connor:

    The local Wells Fargo branch that I reached out to, would NOT do a HELOC on the houses.

    I reached out to every bank, credit union, or other financial institutions within 20 miles... none of their loan officers were willing to help me. No one even suggested alternatives, they were quite useless in my search. I wish I had a relationship like yours with a local lender near me. I have great credit and plenty of income... that's why it was so baffling to me that no one would help me. And I'm also a very nice person, so it's not like I had an attitude on the phone with them, making them not want to deal with me.

    Actually, I did not use a local WF branch, I applied online. Did you try and do all those houses at once? I've only applied for them one at a time. You do have to have owned them at least one year before you apply. 

    I applied for them all at once. I wanted to do a portfolio loan, to do it all at once and just make it easier and more convenient. I called the loan officers, figuring they'd be able to tell me what options were available to me, which an online application wouldn't do. They all told me that I had no options.

    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    5y

    You can't do a HELOC as a portfolio loan but I'll tell you how to do these and keep your interest rates really low. I handle my HELOCs the same way I do my credit cards, by playing musical chairs with them. When you apply for a HELOC (and just do one at a time) ask for a one year teaser rate. About six months apply for another HELOC on a different house, again with a teaser rate. Use the second HELOC to pay off the first one before the year is out. Then call up WF and ask if they have another teaser rate available on the first HELOC (they always do.) I have three of these altogether, but there is no reason you can't get HELOCs on all five if you are patient. This year I didn't play musical chairs because my regular interest rates were so low it wasn't worth the hassle. Yes, they will still require you to get flood insurance, but given what you save on closing costs I still think it is the best way to finance cheap properties.

    1Reply
  • Paul O'Connor
    OP
    Member since 2019 · 35 posts · 9 votes
    5y
    Originally posted by @Susan Maneck:

    You can't do a HELOC as a portfolio loan but I'll tell you how to do these and keep your interest rates really low. I handle my HELOCs the same way I do my credit cards, by playing musical chairs with them. When you apply for a HELOC (and just do one at a time) ask for a one year teaser rate. About six months apply for another HELOC on a different house, again with a teaser rate. Use the second HELOC to pay off the first one before the year is out. Then call up WF and ask if they have another teaser rate available on the first HELOC (they always do.) I have three of these altogether, but there is no reason you can't get HELOCs on all five if you are patient. This year I didn't play musical chairs because my regular interest rates were so low it wasn't worth the hassle. Yes, they will still require you to get flood insurance, but given what you save on closing costs I still think it is the best way to finance cheap properties.

     I feel like that would just get expensive with closing costs. 

    0Reply
  • Susan Maneck
    Investor · Jackson, MS · Member since 2014 · 1k+ posts · 769 votes
    5y
    Originally posted by @Paul O'Connor:

     I feel like that would just get expensive with closing costs. 

    No, the only closing costs with WF HELOCs is the appraisal. I've never paid more than about $400 and that can be added to the loan. That's exactly what makes them ideal IMO. They are time consuming, however. WF can be a real pain sometimes. 

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    5y

    US Bank, among about 2 dozen more, will do HELOCs on investment property.  Specifically, US Bank will do them with an entity. 

    I've gleaned these lenders from the kind people on BP. I have used PenFed and TD Bank for HELOCs on investment property. Post back if you find another lender who serves you well, and I will add them to my list and pay it forward. These were all sourced pre-CV19, so eat the fish and spit out the bones.


    Ridge Lending All in One, first position HELOC https://www.ridgelendinggroup....

    AFCU does 80% LTV on NOO. Utah

    Americafirst 80% LTV on noo 65% LTV Utah

    Arvest Bank AR, OK, AL, MO

    Bank of West (BNP Paribas) 60% LTV ELOCs

    BB&T will loan on a rental portfolio

    BBVA Compass

    Bellwether NH and MA 85% to 100%, draw 10 yrs

    Boeing employee credit union


    California: Cal Coast Credit Union and Fremont Bank

    Citizens Bank -Minnesota, only in-state. Kyle Potswald

    Citizens first position HELOC

    CMG a financial 70% LTV

    East West Bank, up to 60% LTV with "no docs”

    Figure 80% on a rental, not in LLC

    FirstBank CO a and AZ 75% LTV

    First Florida Credit Union https://firstflorida.cumortgag...

    First Commonwealth

    First Midwest, up to 90% Chicago area

    First Republic - California

    Fulton Bank

    GFA Federal Credit Union 10 yr draw, 10 yr repay, MA

    Granite State CU, NH 90-100%

    Great Lakes Credit Union

    Veritex , Texas HELOC

    HSBC 70%, for premier clients only

    Horizon, Kalamazoo Michigan

    Huntington 75% LTV 5 yr IO product available

    Hurst Lending and Insurance Investment property HELOC in Texas. No seasoning.

    Key Bank, FLorida flexible lender, HELOCs on second
    homes and rental properties. 90% LTV on primary.

    Mountain America Credit Union in Utah, 85% LTV, promo rate of 1.99%

    Merchants Bank MN See Pavel Ushakov

    PenFed - max 3 other properties, 89% LTV

    Quorum Federal Credit Union 80% equity, owned by LLC is OK. 5 year interest only payments. New York State. Tiffany Mazzoccoli. 2021

    Regions- yes HELOC but no LOC

    SCCU Florida 70% LTV, 6.25% interest only, not LLC

    Signature Federal Credit Union 75% LTV

    Sound CU "non-owner occupied HELOC, capped at $150K and interest rates are prime + 2%, 3% or 4%, based on credit, not to exceed 70% ltv.”

    S&T Pennsylvania

    TCF Bank

    TD Bank

    TIAA Direct was EverBank

    Trustco

    Union Bank, specializes in noo HELOC. KCMO, NE

    Union Bank, MUFG.

    Upstate Bank in Rochester NY, LOC up to 80%

    US Bank

    Vectra Bank - Colo

    Workers Credit Union, MA 80-100%

    WSFS...up to 70% on rental

    Zions Bank, Utah

    2Reply
  • Mary M.
    Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
    5y

    Have you talked to a commercial loan broker? That is what I would be doing. 

    But agree maybe dont get loans on the flood zone ones. 

    0Reply
  • Cindy Goulden
    New to Real Estate · Member since 2020 · 9 posts · 5 votes
    5y

    @Daniel Reeder what options would you use instead of a lender for flood zones? Thanks😅👍

    0Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 3k+ posts · 1k+ votes
    5y
    Originally posted by @Paul O'Connor:

    Ok, so a little bit of backstory. I have 5 rental SFHs that I'm trying to get refinanced to do a way after the fact BRRRR. (Sorry, I discovered Brandon Turner and BiggerPockets well after I had purchased most of these)

    The houses are all owned outright, all of them are currently rented, with paying tenants. I wish I could upload my spreadsheet that I created, to show you the numbers more easily.

    So... here are the current monthly numbers (remember, these houses are owned, free and clear, no mortgage). 

    Rent: $6,175 (from all 5 houses combined)

    Expenses: $2,906.31 (Property taxes, property insurance, umbrella insurance, vacancy (8.33%), and maintenance (16.66%))

    Profit: $3,268.69 

    So... here are what the numbers are after the refinance. 

    Rent: $6,175

    Expenses: $7,159.44 (above listed expenses, mortgage then $12,500 in yearly flood insurance and closing costs divided by 360 months)

    Profit: -$984.44 (no profit, it's a negative $984.44 per month)

    Net Cash Out from Refinance: $560,087.63

    Interest Rate: 4.00%

    I'm doing 75% LTV loans, and closing costs for the 5 houses is $58,511.79 (this number includes points). What screws me is the flood insurance that the lender is requiring me to obtain on 4 of the houses. Average cost is $3,124.85/yr between the 4 houses (totaling $12,499.41). That's what crushes the deal in my eyes and drives me into negative cash flow.


    I feel like I'm missing something from a certain angle that I'm not taking into account or there is an aspect that I'm missing. I just wanna cut my losses not ($2,233 already paid for flood insurance, surveys, and elevation certificate) and walk away from the loan. 

    Would you go through with these loan? Do these numbers work for you? If yes, please explain. What I'm looking for, is a reason not to cancel the loans. 


    Thank you for your help!

    So I'm coming to this thread a little late and apologize if I'm repeating something someone else may have said. I focus on the following numbers in post. 

    • $560087 Net Cash out from refinance
    • $58511 Closing Costs to refinance
    • -$984/month cash flow from refinance
    • +3268.69 current monthly cash flow before refinance
    • $? how much spend on the original investment

    If this were my deal I'd be using the numbers above to compare the Net Present Value of the original investment with a positive cash flow of $3286.69/month against the refinanced deal w/ $560087 in the bank plus -$984/month negative cash flow. We run our analysis over 5 years. Which ever deal provides the largest Present Value is what you should do.  It's a business case analysis.


    There's also another way to look at this; What can you purchase with $560087 that would replace and/or surpass the lost monthly cash flow and still have $ in the bank.

    312-681-7487
    0Reply
  • Account Closed
    Member since 2020 · 984 posts · 1k+ votes
    5y

    Do all the math a hundred times until you realize you are losing major profits by owning single family homes instead of multi-unit properties. Anyone and everyone who tells you single family homes, in general, make the same, better, or equal profits that multi-unit properties earn is full of b.s. with the exception of when you own single family properties that are appreciating, substantially. I purchase 28 homes in Las Vegas between 2008 and 2010 for 30 cents on the dollar and I made several million dollars. Then, the time came when the property management costs and costs to clean and maintain the properties when tenants moved started to cut deep into my cashflow.

    So, last year, I did the math and realized that I would make a lot more money by selling the homes and purchased an apartment units at super high prices in Los Angeles County and I will still make twice as much profit as the single family homes.

    Another personal rule I have is I never leverage money and take cash out of properties to buy more properties. This does work great for the right people, but there is a lot of inherited risk and when something goes wrong your real estate empire crashes down like dominoes.

    Rather than looking at taking out cash, look at selling the properties and using the money to make higher profits on the same money. Try to do a 1031 Exchange to save capital gains taxes. I could not do a 1031 Exchange when I sold my properties because the time to clean and sell them took more than 1 year. I did the math several times and I paid more than $500,000 for capital gains taxes, but I am now making $167,000 more every year than I was when owning the single family homes. It will take me a little more than 3 years to break even, but looking at the number for 10 years I will be ahead by 7 x $167,000 = $1,169,000 and in 15 years I will be ahead by $2,505,000 without getting loans and with less risks of having my real estate empire crash like a set of dominoes.

    T

    1Reply
  • Jeff T.
    Rental Property Investor · Culver City, CA · Member since 2014 · 222 posts · 79 votes
    5y

    Figure out what you want out of this.  I would hate for you do spend all this money trying to get more cashflow only to lose money buying expensive properties and paying lots of fees.

    You have some good cashflow now with only 5 properties to deal with. It sounds like they are under market rent. Do the math on increasing rents. That seems like the easiest way to increase cashflow. You may lose a tenant but you will be able to rent it at market quickly due to demand.  I have done that recently and turned losers into winners

    0Reply
  • Daniel Reeder
    Rental Property Investor · Birmingham, AL · Member since 2019 · 39 posts · 20 votes
    5y

    @Cindy Goulden Flood insurance sucks out your profits.  Lenders that I have encountered will generally require 100% coverage even if the flood certificate says the risk is low.  So being a cash buyer and making your own decision if it’s something that is needed is a better option.  Then you can choose the amount of the risk you want to insure verses a lender that has skin in the game requiring you to insure the full amount.  Flood insurance is not the best product and being government controlled  doesn’t seem to help.  

    So to answer your question I have not came across a lender that would look the other way when flood risk is involved.  If you are confident in the performance of the property then if possible pay cash.

    1Reply
  • Cindy Goulden
    New to Real Estate · Member since 2020 · 9 posts · 5 votes
    5y

    @Daniel Reeder Very insightful Daniel, thank you!

    0Reply
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