To refinance or not to refinance?

Question

Hi,

Looking for advice on refinancing, and how to best capitalize on my situation. I own a duplex and I am looking to continue investing in 1-4 units homes in my area with any cash that I could free up.

-Loan balance is $65k @ 3% interest, on a 7-1 ARM loan (I am 4 years in), so some type of refinancing is inevitable.

-Mortgage, interest, and tax Run about $675 a month. Then of course there are other costs.

-Rents for $1800 a month

-Estimated value is around $130k based on comps of other rentals in the area.

So the question is, do I refinance to pull the cash out and accept far less cash flow? Or do i maintain high cash flow, do a conservative refinance, and hammer down on paying off the house? I worry that at higher loan values the numbers will not make as much sense, but I also want to keep adding doors to my portfolio.

Thank you.

Blake Hudak · Answer

I appreciate the feedback. Those comments make a lot of sense. I will have to shop around and see what it would take to close on a new loan. If I can pull 30k out and be able to reinvest that in a short amount of time I would be in great shape.

I can definitely see how buying the home with cash, fixing it up, and then applying this method is so advantageous. That would seem like the plan to strive for if you are trying to modestly increase your portfolio every year.

Stephanie P. · Answer

@Blake Hudak

This is really a math problem.

If you refinance and pay off the 60K first, you're only going to net a little more than 30K in cash out (maybe 33K, but with closing costs and setting up escrows etc... the new loan amount at 75% ltv is going to be 97500, so it depends on how much it costs to close).

If the new interest rate is 6%, the new principal and interest amount is going to be $585.  Add a little more for taxes and insurance and you're at $750 or thereabouts?  Cash flow is still good and you've got 30K+/- to use.

Answer the question then, is it worth it?

Stephanie

George Darcy · Answer

If you'r using the proceeds to purchase a good cash flowing property then your cash flow should increase not decrease.  If refinancing increases cash flow on a portfolio basis why not do it.