Overdue for a Bulk Refinance of your Real Estate Portfolio?
The buy-and-hold real estate investor below didn't believe in refinancing. He owned six financed properties. This was a fun/cool transaction that I thought I'd share.
He had four issues / goals and was grudgingly willing to entertain the idea of refinancing:
- Something he didn't like is that for financed properties 7-10, down payment requirements increase by 5%.
- And then you're at 10 financed properties, Fannie Mae's infamous cap.
- I noticed in his paperwork that he paid $500 extra on his primary residence mortgage each month, even though it was the lowest interest rate. It turned out that he had a personal goal of his primary residence being mortgage free.
- Reserve requirements were starting to be an annoyance.
As you may have guessed, he had a lot of equity.
We were able to consolidate six mortgages into three, reduce his P&I total payments by a little bit, and pull a tad over $100k out, all at the same time. Because his total P&I went down a little bit, the portfolio's net cashflow situation is essentially unchanged, but he gained access to over $100k in capital. Some other nice things:
- Now that he only has three financed properties, he can purchase three more with the lower LTV cap.
- Now that he has less than four financed properties, his reserve requirements will be reduced.
- He can purchase seven more properties before hitting Fannie Mae's cap. That's 4 additional "slots" of runway that he didn't have before.
- His average interest rate per dollar financed went down a little bit(1).
- His personal goal of a free and clear primary residence was realized.
The numbers (right click -> open in new tab to see it full-size)....
Some important caveats.
- Most people aren't still sitting in 2001-2007 mortgages. It's easy to look good when someone's in less than ideal financing. Most people will not be able to pull a hundred grand out and have their payments go down.
- I suggested doing 15 or 20 year amortization so he wouldn't reset to year 1 of 30, he preferred to focus on cashflow situation and elected for 30 year fixed financing.
- If your focus, like this fellow, is primarily cash-flow, and paying off investment property mortgages is not a goal of yours (meaning you don't care that you're resetting to year 1 of 30), you can decrease your P&I payment simply by refinancing every few years. I want to emphasize again that you will literally NEVER be debt free using this strategy. So it's not for everyone.
- I can't predict which way real estate values will go, or when. Those two individual properties may end up underwater at some point, but the entire Bay Area portfolio overall should be safe from going underwater.
- This particular person wouldn't have qualified if not for paying off the three other mortgages. We can qualify based on "at closing" LTV, DTI, and # of financed properties, no seasoning or waiting required. He qualified based on the end-state of just those three mortgages @ 75% LTV, not having all six at once, because at the moment of closing POOF he only had three mortgages (technically it takes a few days for the other 3 to literally be paid off, but the cash out proceeds to do that are sitting in escrow).
I personally enjoy big California Mortgage puzzles like this. I very intentionally always work for shops that do both Fannie and Freddie because in this very post I talked about mixed/matched guidelines and things that would be literally impossible if I were Freddie only or Fannie only.
(1) This is the average interest rate per dollar financed formula, handy to use for batch refinances. [ rate1*balance1 + rate2*balance2 + ... rateN*balanceN ] / TotalBalance
