My rental was purchased at $117,900 + rehab costs of $17k. I put a 20% down payment on the property with a 30-year loan at 4.5% interest. Closing costs were $5k. The rehab was paid in cash. My intention was not to BRRRR it, but I am thinking of doing it. I think the property is worth at least $150k. Should I cash-out refinance? I can get a 70% LTV at around 3.5% interest. The refinance cost is $3k. I can get a little of my money back and lock in a lower rate. I think I should do this but wanted to ask the bigger pockets community for advice. I just want to make sure I am not missing something. (I know I can shop around for a better refinance deal, but I want to see if you think it should be done with my current option). Thanks!
I think with those numbers a refinance would be a good play, depending on the equity you have in the deal. If you owe $100k on the deal, and refinance at 70% LTV that will be $105k, minus the closing cost you're only cashing out a couple grand and your monthly payment doesn't change much from the one point of interest. I'm curious to know more of the numbers because if this is a deal you got a few years ago and have some significant equity then this would definitely be a good play.
@Tanner Sherman Thanks for the help! I currently owe $92,700 on my mortgage. The cost to purchase the property was the 20% down payment of $23,580 + $5K closing costs + $17K rehab for a total of $45,580. Even though I am not cashing out a ton of money I figure that a little is better than nothing. What do you think? Are there any other numbers you need?
No that definitely makes sense. In that case I would probably refinance, take what you can get and the lower rate. There doesn't appear to be any downside to refinancing so long as the numbers are where you estimate them. I would start by asking a realtor to run a CMA just to get an idea of the new valuation, just so you have an outside perspective in case you were over zealous about the ARV and don't get stuck in the refinance process with a bad appraisal.
How confident are you in the ARV appraisal coming in at that amount? This is what the BRRRR strategy boils down to in almost every case when trying to determine if it is worth it or not. Plan on a lower appraisal, say 5-10k less and if those numbers work for you then pull the trigger on the refinance.
@Michael Noto Right! I had already reduced my estimate by $10k. I'm confident I can get an ARV of $150k. I would like to get $160k or more, but I had reduced my ARV estimate to $150k just in case.
Hey Matt congratulations on your property; sounds like you got a pretty good deal. If you plan on using the equity from the refinance to invest more then I definitely would do that. I just purchased my first multi-family and after I finish restoring it, I will take out a line of credit. To advance my investment strategy. There is a good saying “ you can’t eat equity”.Good luck and I hope this helps.
@Adam Rust I started with a traditional mortgage and I will cash-out refinance with a traditional mortgage. They told me the seasoning period is 6 months.
@Tanner Sherman@Michael Noto@Brett Catchings After thinking about it for a day I am thinking of just refinancing to reduce my monthly payment and increase cash flow instead of a cash-out refinance. Any thoughts about that? I have money set aside to purchase my next rental so I don't necessarily need the cash-out refinance to make another deal happen. Both options makes sense. I am stuck in analysis paralysis! Can you give me some pros and cons?
Increasing cash flow is always a good strategy. There is no big cons with not doing the home equity line of credit besides, the time it takes to build up your cash for deals. Over time the cash flow would help you reach your end goal possibly. If you were comfortable enough to do two deals at once; you could utilize part of your cash reserves and the heloc. It comes down to the time frame, end goal and risk tolerance. I really like how Warren Buffet states “ slow & steady wins the race”; yet, Grant cardone pushes the “10x thinking”. There are other factors to examine such as how much cash reserves a person has, income and the market that they are in. I hope this helps; thoughts?
Yeah doing a rate adjustment would be a good idea if you already have money set aside. Keeps your monthly payment lower. I would take out the HELOC too, could use that as your "bank" for reno, no obligation to use the heloc until you need it either.