Cash Out vs Cash flow
I am building a SFH house in a college town to rent to students that I plan to hold for several years for cash flow and to build my portfolio. I financed the house with a construction loan that will convert to a 5/1 ARM at a 5.75% rate with a 20 year amortization. I am set to be complete the house by April at which time I will do a cash out refi. So my question is should I use a 75% LTV with a better rate or 80% LTV for more cash out?
The details.
I bought a lot in August 2019 with cash and had to put a down payment to equal 15% total cost for the construction loan. All total after the construction loan closing cost, interest and other misc building cost the total build cost will be around $175k. I will owe around $142k on the construction loan. I will be out of pocket about $33k. I have talked with an appraiser and the value of the house after completion should be around $230k. I have talked to multiple banks and two local options they gave me are below.
Option 1: 80% LTV, 30 year fixed @ 4.75%. loan amount $184k. minus construction loan $142k = $42k, minus refi closing cost. My P&I will be $960 a month but I will still have a cash flow of around $500 a month after taking into account; taxes, insurance, PM Fee, vacancy, maintenance and capex.
Option 2: 75% LTV, 30 year fixed @ 4.00%. loan amount $172,500. minus construction loan $142k = $30,500, minus refi closing. My P&I will be $824 a month with a cash flow of around $635 a month after budgeting for expenses.
Looking at the numbers it will take me just over 7 years to recoup the 5% equity left in the deal based the monthly increase in cash flow. $11,500 cash out vs 1,632 in yearly cash flow. I am a younger investor so I will be looking to put the cash out into another deal as quickly as possible and the extra money would be very helpful finding a good deal. I am also comfortable with the amount of leverage the 80% LTV would provide. What is the best way to analyze how much ROI I would need to make on the extra cash out to justify paying the higher rate assuming I am going to keep the home for 10-15 years then hopefully trade up with a 1031?
Just looking for some advise. Thank you.