West Chester , PA 路 Member since 2017 路 104 posts 路 19 votes
Hello,
I just picked up a rental income property about 2 months ago. Now I'm looking for another. I heard about cash out refinancing the other day and I want to see if its worth it to think about on my current rental.
Heres what I got:
I purchased this property at $73,250 two months ago and put down over 30% and used a conventional mortgage amount of $50,000.
It appraised at $75K during the sale.
Since I have taken possession I put in all new carpets and it is now occupied by tenants and is cash flowing $650/month.
Of course I still owe $50K on the property.
Experts..... is a cash out refi a viable option for me to collect cash to put into another property? Im all ears.
I think cash out refi's so soon after closing a deal only really make sense in a rehab with lots of forced appreciation and you can get your original down payment back?
@Vincent Plant This will depend on what the property would be appraised for today. Most lenders will do a cash out refi up to 85% LTV.
If your property is still worth $75,000 then you can only take a loan of $63,750. This would leave you with around 10k in cash after closing and paying off your existing loan!
Probably not. Most banks will loan up to 80% of appraised value or purchase price. If your appraisal is correct then you might only get around $10,000 less loan origination costs and fees. Not worth it.
I will also say that in my business I dont buy rentals at retail value and I don't buy rentals that the rent/cost ratio is less than 1%. In fact I like to buy at 1 1/2% or better. For example I bought a quad 6-7 years ago, 4 1 bed units, for $75000. they rent for rent for $400 each, a ratio of 2.13%. They have cash flowed very nice, and in 3 years they will be paid off and now worth at least $100K.
Your ratio is at .9%. That is around 11% per year, less expenses, and Capex, and interest on your loan, leaves a small return percentage. Yes, if you sit on the propert until the loan is paid off by tenants, it will be a good rental but that can get real old.
For what it's worth, buy cheap rentals, get smokin deals. Keep moving.
I also may not have understood your post, is the rent $650, or net monthly cash $650? If the latter, then good job. If the former, then I stand on my post.
@Vincent Plant in theory, yes! You can refi and get 75% of the new appraised value. That鈥檒l get you about $1500 not in your pocket - but cost you $4-7K in closing costs.
Doing a cash out refi really only makes sense if you鈥檝e either significantly paid down the mortgage, or significantly added value to the property.
@Steve DellaPelle
Gotcha,
So just so I鈥檓 understanding this.
How does it all look when everything is said and done?
I鈥檝e refinanced my $50k mortgage and I have about $10k remaining after closing costs. So I continue to pay tHE MoRTGAGE AS usUAL?
How is this $10k distributed? What would be the typical terms that I have to pay it back?
When you close on the refi you would get a check for about $10K. Most of the proceeds from the new loan will go to pay off the old loan. You start paying on the new loan per the loan terms. The new loan terms will likely be similar to the existing loan terms.
Because you're doing this only two months after the original purpose, the new lender may use the price you paid, $73,250, for the value, as long as the new appraisal is higher than that. You typically (though not always) need to wait at least six months before the new lender will use a new, higher value from a new appraisal.
@Vincent Plant the refinance would pay off the old mortgage, so you will now have a $63k mortgage on the property, instead of $50k. The difference between the two mortgages would be cash in your pocket
I think cash out refi's so soon after closing a deal only really make sense in a rehab with lots of forced appreciation and you can get your original down payment back?