I am new to REI and still in the early phase of learning (reading books, podcasts etc). I used to live in my rental property for 4yrs before I started renting it out. At the time, I wasn't thinking about REI as a business. Now that I have a different mindset about REI, I was hoping I'd get some advice from you guys.
The house was refinanced for $130K at 2.875% for 15yrs and the monthly mortgage is $1,310 in 2012 with $100K left today. I’m currently renting it out for $1,400, with the intent to increase rent to $1500 next year. However, due to the very little cash flow I was thinking of the following scenarios, in order to still have cash to keep investing:
1. Pay-off the home with $100K cash (which is the current remaining loan balance) and take out another loan of $140K (home valued at $185K – $195K now) for 30yrs with expected interest rate of 4%-6% and use that for investing in other homes.
2. Do nothing.
3. Refinance again- to get better cash flow at interest of 4%-6% for 30yrs.
4. Pay-off the home with $100K cash (which is the current remaining loan balance) and keep collecting rent. At the end of 6yrs the cash investment of $100K will be fully paid off and then, I will be making cash flow of $1,100 ($1,500- $400- taxes).
Please let me know your thoughts. Thanks
Does the $1,310 include escrow for taxes and insurance or is that an expense on top?
By process of elimination, let me rule out #4 first. If your goal is to keep investing, than tying up cash in the same property will not help you meet that goal. You want to cash out as much equity as possible so that you can snowball it into more properties. If your goal is security and wealth preservation style returns, then maybe it's worth dumping the $100k into the property - but that doesn't sound like your goal.
When did you last finance the property? If 12 months has passed, then you can refinance at the appraised value rather than the purchase price. In some cases it can be as low as 6 months while still getting a conventional loan. If you refinance at appraised value, options #1 and #3 become the same thing. And why would you not want the $140K in cash if you can get it? That is if continuing to invest and rolling your equity over is your goal.
That said, if you do get a $140K loan, then the mortgage on 15 years will be higher than the rent, so it sounds like 30 years would be a safer bet.
Following the logic based off a few assumptions I made, it sounds like refinancing for a $140K 30yr loan would be the right way to go to meet your goals.
If the interest on your mortgage is only 2.875, I would keep that as is and use the 100k cash to continue to invest in other properties. 2.875 for 15 yrs is cheap money and you will never get a deal like that on an investment. Most of use who have converted their first home to a rental (with a high ltv, but low interest rate mortgage) don't cash flow for quite a while. Also, is there mortgage insurance attached to that payment? if so that will fall off at some point and help with cash flow.
Thanks for sharing. I have a couple of thoughts regarding your scenarios. First, I would assess what your goals are(e.g. reduce your outstanding debts or leverage to acquire more investment property), and plan accordingly. It sounds like you have 100k liquid to either pay off the balance or use towards other investments. Before you go with #1 I would ask your accountant if there are any tax consequences with the paying off the balance and then doing a cash out refi, as that might cut into the 140k. It most likely will not, but always check first. The refinance path, or # 3, seems like the most viable, as it will increase your cash flow, and allow you to utilize your 100k to invest elsewhere. In addition, you should be able to refinance up to 80 % LTV which might allow you to pull out the additional 40k without having to pay off the balance before hand. This, of course, is if you are choosing the leverage path. If debt free is your desired path then #4 or # 2 will get you there the quickest. Just a my thoughts. Best of luck to you!
@Hamed Lawal, to make the best choice, I think first you need to ask yourself this question:
Which is more important to you, positive cash flow or cash in hand to invest?
If cash flow is what you need, refinance the 100k mortgage to a 30-yr. This is reduce your monthly payment quite a bit and increase your cash flow.
If you want to have some cash so that you can invest elsewhere, do a 30-yr cash out refi and take the equity out.
Just my 0.02
Thanks Everybody. I really appreciate your comments. Might end up with the Do nothing because of the low interest rate on the loan. Thanks again!
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