Non-appreciating market refi question

8 Replies

Hey all, thought I would seek your advice. I own two SFH rentals in a flat market that is not appreciating and will most likely never appreciate. Both properties are on 5 year balloons (20 yr amort.), with one of the loans coming up for maturity .I want to refinance both prior to rates going any higher but I am torn over whether to hold both in a commercial loan for 5.5% giving me access to a LOC on them and not tied to personal credit (excellent credit), or to hold both as conventional Fannie Mae loans with a longer term, 20-30 years, and cashflow a little bit higher. I have roughly $70k in equity on both, one being worth approximately $105k, the other worth approximately $75k.

I am interested in long term holds on good SFH rentals, as I have other projects in the works for shorter term gains. Just not sure these two are worth hanging on to. Any thoughts are appreciated.

Rich

Three questions:

1 - With the commercial loan, will these two properties still cash flow to your satisfaction?

2 - If these properties were appreciating, what impact would the gains in appreciation impact your future investing?

3 - If the properties don't appreciate at all, is your cash flow going to be impacted?

4 - (OK, I can't count)...When you first bought these two properties, why did you buy them?

Talk to a loan broker for options.

@Rich Wilken I'll give a really general answer and say that I'd lock in a 30 year fixed rate mortgage right now any chance I could get. Maybe rates will be the same 5 years from now but I wouldn't count on it. With a commercial loan you'll always have some degree of "interest rate risk" with the 5/7 year period. Taking the 30 year amortization table and it's cash-flow advantages out of it, I think that locking in a mortgage payment (in a flat market that might also have flat rents) is a pretty smart thing to do. The last thing you'd want to do is refinance in another 5 years, have a higher interest rate (then), and now your PITI puts you cash-flow negative if rents haven't increased.

Thanks for the thoughts all. @Joe Villeneuve 1.&3.&4. The properties will still cash flow. I originally bought them as a place to park some money as I lived very nearby. Back then, the market there gained a little. Not anymore. 2. If they appreciated, I would probably refi and pull equity out or park them in a commercial loan and use the LOC.


@Andrew Johnson I've been leaning towards your suggestion. There is a time value to money, and I will most likely extend the term to use the cash flow for another property. Pretty much anything I've offered on around here investment-wise has required a cash so it doesn't really matter if they are on my personal credit or not I guess. When I have 7 more I can worry about it then, right? might as well take advantage of the "lower" interest rates between the two while I can. 

They will cash flow at 5.5%.  I'd like to have access to that credit line for cash offers/ short term property acquisition, etc. but we don't know what's gonna happen here with these interest rates 5 years from now. 

@Rich Wilken I think I just look at a fixed-rate mortgage for a non-appreciation market as a way to 'lock-in' profit (cash-flow) to the greatest degree possible.  My experience has been that non-appreciation markets also don't crash like appreciation markets when something goes sideways.  They just kind of bumble along.  Rents never jump up a whole bunch or crater downwards.  The primary risk really is occupancy, renter pool, a town "dying", etc.  Nevertheless, if you have stagnant rents I think there's disproportional value in having a 'stagnant mortgage payment'.  It's a little antithetical to a lot of thoughts on BP about max leverage, chasing max returns, etc. but you have two "devil's you know" and might have a way to de-risk future cash-flow.  When you listen to a lot of folks on the podcasts there is always the thought of "singles and doubles aren't bad" and what it sounds like you have (with a 30 year fixed-rate loan) is a way to ensure that you have a couple of singles or doubles.        

Originally posted by :

Thanks for the thoughts all. 1.&3.&4. The properties will still cash flow. I originally bought them as a place to park some money as I lived very nearby. Back then, the market there gained a little. Not anymore. 2. If they appreciated, I would probably refi and pull equity out or park them in a commercial loan and use the LOC.

If your original investment intention was to be able to move forward with the cash from the appreciated gains when you refinanced, and you can find another property or two that will give you the same cash flow, if it was me, I would sell to get your current cash out, and buy into appreciating properties...THAT CASH FLOW.

Keep your cash moving.  Cash is a verb.

@Rich Wilken  30 year fix will give you cash out option which will increase liquidity for next  investment. If you are interested to hold on these properties 30 year fix will give fix interest rate and passive income. 

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