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Sarah Moncivaiz
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Refinance or sell to scale?

Sarah Moncivaiz
Posted May 24 2022, 03:37

We are at a crossroads. We own a rental that is currently worth 700k. Our 1st mortgage is approximately 130k at 2.75% with a PITI of $2000 and we have a Heloc that is currently about 115k with a minimum payment of $290/mo. The renters are paying $2700/mo. With rates going up, we need to make a decision. Do we cashout refinance and consolidate the existing debt? Do we cash out refinance and squeeze every possible penny out of it to reinvest? Or do we sell it and reinvest.

As of now, we are financially stretched pretty thin. I want to scale up, but I'm having trouble seeing how we can sustain more debt payments. 

Please help me draw back the curtain.

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Greg Kasmer
  • Rental Property Investor
  • Philadelphia
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Greg Kasmer
  • Rental Property Investor
  • Philadelphia
Replied May 24 2022, 04:20

Sarah - This is always a difficult decision, but please note that there is always no "wrong" decision about how to access your equity in the property. When you're looking at tapping into the equity I like to look at the Return on Equity (ROE) calculation. By the data you mentioned it looks like you have about $570k in equity (700-130k) and you're garnering about $700/month or $8,400 per year, which equates to about 1.4% ROE. I would then do the calculation on a refinance option. Let's assume you'll have a 75% LTV and get a 5% interest rate on your loan of $575k, leaving a payment of approximately $3,100 on a 30 year loan. Then you would have negative cash flow. Therefore, to me, it makes sense either to keep your current loan and utilize the current HELOC ( or get a larger HELOC) OR sell the home and recapture all the equity. As always, it depends on your goals, but if part of your goals is cash flow, you do a similar analysis with your own assumptions. Hope this helps!

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Jaron Walling
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  • Rental Property Investor
  • Indianapolis, IN
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Jaron Walling
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  • Rental Property Investor
  • Indianapolis, IN
Replied May 24 2022, 04:47

I agree with @Greg Kasmer because rates already went up. It's not like you were going to benefit from a rate prospective anyways. Your current rate is literally "free" money so keep what you have or sell the property and buy into something else. At a minimum secure a HELOC and start searching for the next opportunity.

Picture this; it's 2032 and you still own the rental. Local rents have increased (as they usually do) and now the tenants are paying $3400 per month. Did the cash-flow over the years justify HOLDING the property? What's the property worth 10 years from today? What items needed repaired killing the cash-flow? This is the mindset that separates home owners vs investors. 

Edit: If you're pushed thin financially don't take a loan, HELOC, or anything on this property. Get 3-6 months worth of reserves in place and carry on. Over leveraging right now is risky.

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Evan Polaski
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Evan Polaski
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Replied May 24 2022, 04:58

@Sarah Moncivaiz, welcome to portfolio construction.  You are in a good position.  But refi'ing only makes sense if you can push rents to not be cash flow negative, AND you believe the property will continue to appreciate.  If you think values will remain stagnant, sell now and buy a property that can a) cash flow better and/or b) higher likelihood of strong appreciation.

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Andrew Garcia
  • Lender
  • Charlotte, NC
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Andrew Garcia
  • Lender
  • Charlotte, NC
Replied May 24 2022, 06:17

Hi @Sarah Moncivaiz, the issue with refinancing is that you would go negative on the cahflow. That is okay if you are going to reinvest that money somewhere that can make up the cash flow. P&I on the new loan at a 75% cash-out would be around $3,200 a month.

If you can make up that difference by investing the $275k, by all means, do it. However, since you are stretched thin, I would sell and reinvest that money somewhere that would provide you with better returns.

Hope this helps! Let me know if I can be of any assistance.