We purchased a great property in 2012; due to appreciation and aggressively paying down the mortgage, we have some good equity in the property. This allows our monthly cash flow to increasing.
We are looking to purchase another property and are trying to consider all options for the down payment funds. We can borrow against my 401k and use some cash savings, OR do a cash out refi on one of out properties to help leverage us. We will likely do the BRRRR method and do the refi, but my question is how do you determine the right balance of debt reduction and cashflow?
I'd probably pull as much out as I could with still maintaining a solid $200/mo or so cashflow. Interest rates are fantastic right now so there's not really a better time. Then take all that cash and buy the next thing.
Are there any easy win type of improvements you can make to the property now right before you refi? Could any improvements raise the rent up any further?
You can keep doing BRRRR on your own houses over and over. After the tenant leaves, remodel, add value, find a tenant at a higher price and refi even more cash out.
Yes the BRRRR method makes sense as far as leverage but I hate to tap into all the equity as again, the more we have the better the cash flow. I understand that having more equity in a given property may not provide the best ROI but looking long term we want our properties paid off. Then we can act as a bank as far as using the given equity for other investments and/or providing Hard Money to other investors. I guess the balance is really case by case.
Paying down the debt will give you a higher cash flow and equity in the home. Try looking at it another way. If you take a few steps back with one property in terms of how much you owe and use that to buy another property, you will get ahead faster in the long run. So borrowing $50K from one place to buy a second, means your rental income has doubled. Once they are both paid off, you have two homes free and clear.
Also, from one perspective, paid off properties carry a higher risk than one with a large mortgage on it. If a tenant decides to sue you for some reason, one of the first things their lawyer will do is look up your house and see how much debt is owed on it. If you own the house free and clear, the lawyer sees a nice juicy target.
How does paying down the debt give anyone better cash-flow..?
If the expenses (assuming fixed 30 yr) and rent stay consist it doesn't make sense to me.
Updated over 2 years ago
Equity is trapped in the property unless you sell or HELOC.
Having a HELOC the pmt is based on the balance you keep. We used one for some Reno and by paying that down we increase our cash flow. At some point refinancing to lower your payment is a great option.