I'm in New Orleans, LA and have purchased a couple rental properties. I have a WWTBPCD (What would the Bigger Pockets community do?) question. I'm looking for suggestions on the most efficient or fastest way to free up cash flow (or possibly generate more cash flow based on the resources/options/assets I'll list below).
A slightly above median 5-figure-paying day job
3 rental properties:
1. Duplex A in A-grade neighborhood purchased 11/2015, generates about $180 in monthly cash flow: FHA loan, ~3% equity based on original purchase price; property has probably increased in value as of today, but I'm not sure how much. I'm paying about $220 in PMI per month.
2. Duplex B in a B-grade neighborhood - I'm living in one side, renting the other, inherited some great tenants who pay a couple hundred a month below market value; purchased 6/2017 15% equity conventional loan; monthly I'm paying 45% of the mortgage, which includes $40 a month in PMI - roughly $13K would get me to 20% equity, and I gather I have to pay ~$600 for an appraisal to validate I've reached the 20% equity threshold once I'm there; tenants are paying 55% of mortgage, 10 months left on lease; I also need to reside here for 10 more months, but then I could move to a place with lower rent and then could rent my side for true market value.
3. Single Family residence in a A-grade neighborhood - purchased 12 years ago, over 60% equity, generates excellent income due to being purchased so long ago. No issues here. Extra income generation from this property can be used to get equity or pay extra on the other two properties.
Additional note: I purchased the duplex in which I live now a few months ago so my cash reserves are very low and I'm rebuilding them. This will be resolved in a few months at which time I'll have the flexibility to take (or not take) action to improve cash flow.
Some thoughts I had: Should I funnel all extra cash from the SFResidence into Duplex A to try and get more equity while interest rates are still low--then refinance? Or do I funnel all extra cash from the SFR to Duplex B to get rid of the $40 PMI as quickly as possible? Or do I just funnel all extra cash into emergency savings or some type of investment and just keep doing that and just allow the PMIs to fall off on their own over time?
Seems like there are a lot of possible options and I feel a bit overwhelmed. On the PMI front I'm paying about $265 a month total, most of which is being paid by the tenants.
Curious as to what others suggestions/thoughts are.
One additional note: I was informed the FHA loan on Duplex A will not automatically drop the PMI once I have 20% equity. I will have to refinance to get it off, which means potentially a few thousand dollars in closing costs. I thought that was wrong but I've had a couple different lenders tell me that. Perhaps a recent FHA loan requirement change.
My preference is for around 50% LTV on my properties. I don't feel the need to own them outright, but I like my loans low enough so that I can sleep at night. The 50% level does it for me. Each person is different in that regard.
First things first: I would make sure that I had enough reserves to take care of both my personal stuff, and my properties.
I wouldn't touch the SFR. I would use excess cash flow (after doing the above) to pay down the new 2 unit. I would keep an eye on the LTV of that, so that as soon as I could lose the PMI, I would.
I would look at my comps for the FHA property, and see if you can meet the thresholds for a conventional refinance without PMI. That will free up $220 in cash flow each month. Even if it costs you ~1200 to refi, that is less than 6 month payback, which is great.
This is assuming that the FHA property has increased to the point where it can be refinanced without PMI. If that is not the case, put your excess cash flow into that and refinance it ASAP, since that will give you the best return.
Keep saving from your W2 income for the next down payment, and use just the cash flow from the buildings to do the other work.
Hope that helps!
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