Should i refinance?

5 Replies

My dad owns 41 units right together. He has $800,000 in them. The rent from them have been paying the loan for 4 or 5 years. He said a few years ago they appraised around 1.2m and since then have fixed several of them up. What opportunities do you all see with this to either put more money back into them or take money out and buy more properties?

You should be seriously looking into pulling out all the equity possible. Based on the opportunity value of cash and the risk posed by having dead equity at risk to a market shift.

All equity in the property is now only earning a return equilivant to the prevailing mortgage interest rates. That return is barley worth investing in based on cash having a opportunity value of a modest 10%. Your equity is reducing your possible returns not increasing your cash flow.

If your father has no use for additional income he could leave it where it is and not care if it is impacted in a market shift or he could pull it out and invest in a income fund or a REIT. Flip a coin.

Originally posted by @Thomas S. :

You should be seriously looking into pulling out all the equity possible. Based on the opportunity value of cash and the risk posed by having dead equity at risk to a market shift.

All equity in the property is now only earning a return equilivant to the prevailing mortgage interest rates. That return is barley worth investing in based on cash having a opportunity value of a modest 10%. Your equity is reducing your possible returns not increasing your cash flow.

If your father has no use for additional income he could leave it where it is and not care if it is impacted in a market shift or he could pull it out and invest in a income fund or a REIT. Flip a coin.

 Actually, the equity isn't really earning anything if he has positive cash flow since he isn't saving the interest payments because his tenants are paying them.  If he still has positive cash flow after a refi, then he should refi and reinvest for two reasons:

1 - To actually get some gains from his equity
2 - To protect his equity which is now at risk...as @Thomas S. has already stated

Agree with @Thomas S. and @Joe Villeneuve :  Extracting the equity to redeploy into either a new asset class or a diversifying RE income stream would mitigate the risk of that equity evaporating due to market conditions.  It is also a way to keep your money working for you rather than sitting as equity on a balance sheet.  

From there it is a matter of how passive your father would prefer the next investment to be.