Recast (principal paydown) vs. Investing in another property

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Recast (principal paydown) vs. Investing in another property

Matthew McNeil
Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

Honored to be a part of the BP family, and I’ve learned so much!

I own 3 SFH properties. I have enough money to do a $50K Recast on one of my properties with the highest principal owed. Recast meaning paying a lump sum toward the principal which results in re-amortizing the loan (note; this is not a REFI). Lender charges a flat $500 fee. I actually did a Recast on another property last year that shaved $250 off my monthly payment, which added to my cashflow.

Rearview mirror hindsight is a great mentor, and although I don’t regret doing it I realized sometime later that the drawback of recasting is I ended up trading fluidity for equity.  

My question is simple; invest the $50K in a Recast on an existing property, or invest the $50K in another property?  Would appreciate numbers to support varying perspective.

Thanks!

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  • Jeff Betschart
    Rental Property Investor · Parker, CO · Member since 2017 · 80 posts · 15 votes
    8y

    Matthew

    Im in the same boat as you and my thinking was to reinvest it until you get to the number you want to be at. Then you can start paying down principal and getting to the overall cash flow you are looking for. Money you have on hand is a better deal than hard money.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    There are a couple of investment reasons not to do it, one you will reduce your return on investment and second, based on the opportunity value of cash, you are buying cash flow at a rate of $2 for ever $1 it generates. Equity is not really investing or increasing cash flow it is simply a expensive way to buy cash flow and park cash you have no other use for.

    It can also be difficult if not impossible to access if needed in the future and can vanish with a market correction. Better to risk the banks money in a correction and spread your own around to generate maximum returns. Or diversify and invest outside real estate to increase returnes.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Thomas S.:

    There are a couple of investment reasons not to do it, one you will reduce your return on investment and second, based on the opportunity value of cash, you are buying cash flow at a rate of $2 for ever $1 it generates. Equity is not really investing or increasing cash flow it is simply a expensive way to buy cash flow and park cash you have no other use for.

    It can also be difficult if not impossible to access if needed in the future and can vanish with a market correction. Better to risk the banks money in a correction and spread your own around to generate maximum returns. Or diversify and invest outside real estate to increase returnes.

    I think it depends on where the asset is located IE here in Portland a red hot market and historically solid ( at least sinc e1992) or take the 50k and invest in the hood somewhere in the mid west.. me i would recast the mortgage.

    or take the 50k and invest in a reit or syndication deal etc.. and diversify or buy a performing NOTE that is solid and make 8 to 10% on that.

    then the thought is if you buy a rental do you want to do that for long term as this is work.

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  • Steeve Breton
    Investor · Natick, MA · Member since 2013 · 108 posts · 69 votes
    8y

    @Matthew McNeil All depends on your 5 or 10 year goals. I'm guessing your at the early stages of your investment career. If so, then you are likely looking to buy a several more properties in the next few years. If that is the case, and if you are clear on that goal, then focusing on acquisition is the obvious answer. Purchase another quality asset and put long term, low interest rate, debt on it. If you aren't certain that you want to grow your portfolio, then maybe look to invest in something more passive such as a syndication. Depending on where you live and where you're buying SFH, you may get a better risk adjusted return. That's what I ended up doing after purchasing my first small multifamily properties. I just didn't see the point in scaling my personal portfolio when I could invest passivly in quality assets sponsored by others.

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  • Matthew McNeil
    OP
    Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
    8y

    Thanks much to every one for the great feedback!

    Jay, my 3 SFHs are located in Meridian, Idaho which is growing rapidly!  The median home price of $270K was up 9.5% from the previous quarter and is up 21% during the past year.  I’ve purchased 2 SFHs in the past two years, and the one I bought in 2017 is up $50K in value.

    However, the current seller’s market is overpriced and my realtor confided to me that investors aren’t buying as many investment properties as in previous years because the rents aren’t keeping up with the rising home prices.  That "disproportion" erases net cash flow for investors looking to buy SFHs in the current market as they look at their spreadsheets.

    That said, my secondary follow-up question is this. Rather than doing a Recast, if I invest the $50K into another SFH (at a price point that's right for me) I'll end up with $0-100 net monthly cashflow compared to my 3 other SFHs that are producing $2200/month net monthly cash flow (cumulatively).

    Based on the incredible growth going on in the Boise/Meridian Treasure Valley area (with an additional 400,000 new residents expected to move into the valley in the next 30 years) is it worth it to have a rental in my portfolio that is funding its expense but not netting anything to me?  Is it worthwhile to let that one SFH have a growth in equity strategy? In a simplified nutshell; I'd have 3 SFHs with healthy positive net cash flow that can fund all expenses included a significant maintenance issue that might pop up + 1 SFH with zero cash flow, but expenses are funded.

    Thanks!

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    8y

    I would do the recast and open a HELOC to provide liquidity. Markets move in cycles so you will be in a strong position when the next downturn comes and will be ready to buy when others have to sell.

    Someone is sure to bring up that HELOC can get closed or frozen during a sever downturn. That is a small risk to take and, if you think things might be going that way just draw down the HELOC and move the money to another bank.

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  • Lane Kawaoka
    Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
    8y
    Matthew McNeil the recast will just keep pace with inflation. Investing will make you 10-30% a year. This is not the same if you want the warm and fuzzy feeling of debt pay down.
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