Cash Out refinance on a free and clear

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Cash Out refinance on a free and clear

Enrique H.

Indianapolis, IN · Member since 2015 · 57 posts · 4 votes

Hi,

What would you do?

I have 3 homes ( 2 with mortgage 1 free and clear)

If I refinance the free and clear I can pay off the 2 that have a mortgage. the number are as follow.

collecting $1250 from the free and clear. $975 and $1150 for the 2 with mortgage ( mortgage payment for the 2 mortgage is $1800). cash after mortgage payment = $ 1575

if I cashout the free and clear my payment will be $950 month for 30 year including piti.

cash out will get $90k and will be able to pay off the 2 other mortgage.

new cash flow $2425 ( minus pi and other basic expenses like vacancy capex etc etc.

is this a good move?

or should I just cash out and keep money in reserves?

Thank you ( hope is not too confusing)

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Marc Winter

Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 3k+ votes

Borrow from Peter to pay Paul. Sorry, does not compute.

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Why would you pay off the other mortgages if they are cash flowing now? You have to recover any money YOU spend before you make a profit. That added CF you think you're getting is just reimbursement for the money you used to pay off those two mortgages. Look at it this way. You're buying a limited increase in CF/month...at a cost of the money you got out from the REFI...which you are also paying for.
Let the tenant keep buying you equity, and use the refi money as a DP on more cash flowing properties.
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Marc Winter
Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 3k+ votes
6y
Borrow from Peter to pay Paul. Sorry, does not compute.
4 Reply
Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
6y
How much will it cost in refi fees to move the pea from under 2 shells to one?

What rates do you have now on the 2? What rate will the new loan be at? I assume all loans are long-term, fixed?

I could see doing this for more favorable terms if it costs less than $2800 net of pre-paids and if it helped keep me under loan limits (4, 10) or to burden balance loans between my wife and I, ie free up credit for one of us.

What is the purpose of doing this and is it worth the pain and costs a refi is? Its a cost/benefit analysis, but we know neither.
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Salvatore Lentini
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
6y
Let your TENANTS pay off your mortgage, not you. Use YOUR money to buy more investment properties.
3 Reply
Enrique H.
OP
Indianapolis, IN · Member since 2015 · 57 posts · 4 votes
6y
Originally posted by @Joe Villeneuve:
Why would you pay off the other mortgages if they are cash flowing now? You have to recover any money YOU spend before you make a profit. That added CF you think you're getting is just reimbursement for the money you used to pay off those two mortgages. Look at it this way. You're buying a limited increase in CF/month...at a cost of the money you got out from the REFI...which you are also paying for.
Let the tenant keep buying you equity, and use the refi money as a DP on more cash flowing properties.
im just thinking that if tenants stop paying rent for a few months my payment will be less if I refinance. maybe im overthinking.
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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
6y
Originally posted by @Enrique H.:
Originally posted by @Joe Villeneuve:
Why would you pay off the other mortgages if they are cash flowing now? You have to recover any money YOU spend before you make a profit. That added CF you think you're getting is just reimbursement for the money you used to pay off those two mortgages. Look at it this way. You're buying a limited increase in CF/month...at a cost of the money you got out from the REFI...which you are also paying for.
Let the tenant keep buying you equity, and use the refi money as a DP on more cash flowing properties.
im just thinking that if tenants stop paying rent for a few months my payment will be less if I refinance. maybe im overthinking.

Over thinking. Here's what you're doing:
Add up a full year of payments, assuming 12 months vacant or non-payment. Would that number be <= or > the amount of money you spent doing your tenant's job for them.
...or,...
Look at it this way. How many vacant or non-pay months did you over spend, trying to cover a "few months" of your tenant not paying.

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Joseph CacciapagliaBusiness Member
Lender · San Antonio, TX · Member since 2020 · 1k+ posts · 1k+ votes
6y
If the rates are better than your current loans, why not cash out all 3? That way you have plenty of cash for any softness in your market, and also capital to pounce on any opportunities that may come up. Whenever you get too focused on paying off debt, you should stop and calculate your ROE. As long as rates are anywhere near where they are today, I will never pay off my mortgages.
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John MorganPro Member
Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
6y
@Enrique Hernandez
I like cash outs. I did 3 last year to acquire more properties. I like the cash flow you'll have if you pay off the other two mortgages. If you have a W2 job and don't need the rental income, I would consider taking that 90k and putting it to use instead of paying off your mortgages. Make low ball cash offers for other properties. That's what I did and got some great deals. Then maybe BRRRR one or two up and keep repeating. I would start the process with these low interest rates and keep your options open.
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Enrique H.
OP
Indianapolis, IN · Member since 2015 · 57 posts · 4 votes
6y
Originally posted by @Marc Winter:
Borrow from Peter to pay Paul. Sorry, does not compute.
LOL. with a restaurant background I'm so use to doing just that.
thanks Marc for pointing that out
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