Looking for some creative financing to pull money out of rental

Creative Real Estate Financing
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Looking for some creative financing to pull money out of rental

Rich Lopes
Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes

Hi 

Looking for advice on the following scenario:

1. Currently own a rental property worth about 1.3M. Owe about 600K on this property on a 30 yr fixed @ 3.75% with 27 years to go. Rental history of 4 years with current Rent of $3900 / month.

2. Looking to do cash out refi and take out about 300 - 400K for a down payment to buy SFH for a primary residence. Currently living in a rental.

3. What are some of my best options in terms of financing? 

Hope to you hear from some creative financing gurus. TIA.

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Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
10y

Hi @Michael Vallee and @Rich Lopes,

Re: Michael's 2nd mortgage @ 7% idea, as applied to Rich's scenario.

What's that? What's my watch say? My watch says that it's MAAAAAAAAATH TIME!

($600k * 3.75% + $300k * 7%) / $900k = 4.83%. 

That's the weighted interest rate of all your debt on that property if you take out a $300k 2nd at 7%. If you think back to when we were kids and learned how to find the mean average of something, that formula will look familiar to you. :) 5 grapes plus 7 grapes divided by 4 children equals an average of 3 grapes per child. In this case, the financing would be at an average cost of 4.83% per dollar. 

And you're probably going to pay 3 points or so upfront for that hypothetical hard money 2nd mortgage on an investment property to 70% CLTV, assuming you could get it.

I don't have any credit reports in front of me, but I'm pretty sure you can do a little better than 4.83% at a cost of three points. Call it a hunch, it's not like I do mortgages or anything.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    I hope you hear from some CA gurus too, out of curiosity, because in my area you would never be able to pull cash from a negative cash flow property.

    Out of curiosity why do you want to take on the liability of a personal home when renting is less expensive. If you get the money why not invest in another rental.

    1Reply
  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y

    Thanks Greg. How did you determine that it's a negative cash flow property? I am just about to break even. The reason I want to own a personal home vs another rental is to take advantage of tax deduction on Mortgage, property tax etc. Although I can do the same on rental property but the rental income basically nullify the deductions and I feel like I am paying way too much towards my rent and might as well buy a property and let it appreciate while I pay it down. As far as liability, don't you think it's same on both personal vs rental? 

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    Because your principle and interest payment is probably hovering around $2,800/month, not including property taxes and insurance, maintenance and any allowance for capex.

    But forgetting about cashflow, your return, even if had NO expenses or payments of any kind would be around 3.6% based on a valuation of $1.3m.  You'd be way better off selling it and taking the money and putting it into something that actually rewards you for the risk of owning real estate.

    Now, if your cashflowing at $500/month that's around .5% return for the year.  You'd be better off putting the money into a cd.

    2Reply
  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y

    @Simcha Davidman, Thanks for the advice. No, I am not planning on selling this currently hence I had this question otherwise it would be no brainer. My initial investment in the property was only $800K and not 1.3M so I believe my returns are slightly better that what you have calculated above. 

    0Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    @Rich Lopes Is your expectation for more appreciation?  If not, then your annual returns will be dragged down the longer you hold it.  Not lose money, of course, but less gain.  You're already sitting on a gain of over 60%.  The longer you hold it, the less valuable that gain becomes.

    Either way, I think having that large of an asset it pretty cool, so good luck with it!

    2Reply
  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y

    Yes more appreciation and as it is it's so hard to own a RE in SF, Bay Area. 

    0Reply
  • Samir Pathak
    San Francisco, CA · Member since 2016 · 34 posts · 8 votes
    10y

    Hey @Rich Lopes - where is the house located, what type of residence, and is the $3900 FMR?

    0Reply
  • Michael Vallee
    Real Estate Agent · Scottsdale, AZ · Member since 2016 · 63 posts · 16 votes
    10y

    @Rich Lopes Hey Rich- I'm exploring establishing a loan with a personal lender that attaches a lien

    against my property in exchange for a decent interest rate 6-7%.  Safe and better than $ in the bank.  This is because of the 2nd loan $ going away...I will let you know how it turns out. I don't want to sell to get liquid either.

    Best,

    Michael

    0Reply
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y

    Hi @Michael Vallee and @Rich Lopes,

    Re: Michael's 2nd mortgage @ 7% idea, as applied to Rich's scenario.

    What's that? What's my watch say? My watch says that it's MAAAAAAAAATH TIME!

    ($600k * 3.75% + $300k * 7%) / $900k = 4.83%. 

    That's the weighted interest rate of all your debt on that property if you take out a $300k 2nd at 7%. If you think back to when we were kids and learned how to find the mean average of something, that formula will look familiar to you. :) 5 grapes plus 7 grapes divided by 4 children equals an average of 3 grapes per child. In this case, the financing would be at an average cost of 4.83% per dollar. 

    And you're probably going to pay 3 points or so upfront for that hypothetical hard money 2nd mortgage on an investment property to 70% CLTV, assuming you could get it.

    I don't have any credit reports in front of me, but I'm pretty sure you can do a little better than 4.83% at a cost of three points. Call it a hunch, it's not like I do mortgages or anything.

    4Reply
  • Tim Puffer
    Lansing, MI · Member since 2015 · 301 posts · 149 votes
    10y

    @Rich Lopes - Upon first glance my mind says sell this property and use your gain to 1031 into a cash flowing property in a different market. Banking on a ton more appreciation is like throwing your money in the slot machine. 

    1Reply
  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y
    Originally posted by @Samir Pathak:

    Hey @Rich Lopes - where is the house located, what type of residence, and is the $3900 FMR?

    @Samir Pathak, It's a SFR in San Jose. What's FMR?

    0Reply
  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y

    Thanks @Tim Puffer and @Michael Vallee. 

    Tim, I like the idea of 1031 exchange. But with 1031 how would I be able to use some of the proceeds from the sale for my first goal of buying myself a primary home. Buying another cash flowing property in a different market is not something I have thought about and I don't think I am ready for that yet :). But thanks for the suggestion. 

    Michale, please do let me know how it goes.

    @Chris Mason, Thanks very much for that insight - never really thought from that angle. If I can get the mean or avg. down to 4.2 to 4.3%, I will be all over it. Time to get to work. 

    0Reply
  • Tim Puffer
    Lansing, MI · Member since 2015 · 301 posts · 149 votes
    10y

    @Rich Lopes - there will never be a right time, or perfect time to do anything. If you wait for that time you will never arrive at anything. 

    What is your motivation for buying a personal residence??

    0Reply
  • Michael Vallee
    Real Estate Agent · Scottsdale, AZ · Member since 2016 · 63 posts · 16 votes
    10y

    @Chris Mason Respectfully, not everything is math...there are all sorts of reasons that someone may be in a position to pay a higher rate, these "challenges" (DTI, Credit Score, BK, F, etc) can be overcome by going to person lender who can overlook these and a deal can be "handcrafted", secured against the collateral vs. fitting into some bank's guidelines.

    Best,

    Michael

    1Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    10y

    @Rich Lopes,  You could certainly sell and do a partial 1031 exchange.  The requirement to fully defer all tax is that you purchase at least as much as you sell and you use all of the cash proceeds in the next purchase or purchases.  If you wanted to pull cash out as a down payment on a primary you could but would pay tax on that amount.  But there's all sorts of other options.

    1. You could also complete a full 1031 exchange and then refi to take cash out (You would not want to refi the existing property if you anticipate selling it and doing a 1031 in the next few months).  This cash would not be taxable.

    2. You could do what has been suggested and keep the existing and refi to get cash for your down payment.

    3. You could complete a 1031 exchange and buy two replacement properties - one of which might make a great primary residence later.  Buy it rent it, and stay in your rental for a year or so and then decide to move into it.  By converting it into your primary residence you set on a path to convert some of the gain from tax deferred to tax free.  That could be a pretty powerful factor.

    Be careful that you're not chasing tax breaks at the expense of the the big picture. Tax deductions are nice but they are never one to one. In your case yes you would get more tax break from a primary residence that is not offset by rental income. But those tax deductions are only partially compensating for actual dollars from your pocket. In addition don't forget that the rental income also includes a principle reduction amount that adds to your net worth each month. Letting tenants pay for PITI and more but not getting a tax deduction on costs you otherwise bear yourself is not so bad. And you don't get depreciation on your primary.

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  • Rich Lopes
    OP
    Rental Property Investor · San Jose, CA · Member since 2016 · 114 posts · 54 votes
    10y

    @Dave Foster, Thanks! I like #3. Yes, I understand the deductions are not 1-1 but that would still be huge considering how much I pay towards the rent. I agree on the Rental income and how it helps pay down the principle, hence selling is not my top priority. 

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