Refinance for cash flow?

Question

I have a rental that was bought as my residence about twelve years ago.  Cash flow neutral after expenses.  Value about 165,000.00 Purchased at 130,000. Owe 90,000.  Will be paid off in 15 years as it stands.  Trying to decide whether or not to refinance to increase cash flow.

Last year tenants paid down over 3k in debt for me despite the lousy cash flow.  I naturally lean towards paying down debt for the eventual jump in cash flow when it is paid off.  The other option is to refinance the existing balance to increase cash flow by maybe 200 dollars.  Interest rate will probably stay about 5% if my numbers are right.  I would roll fees into the loan probably.

Other pertinents: I have one other rental that we recently purchased (with better cash flow) and hope to own many more.  I am teetering between these options right now.  Any increase in cash flow would be used to purchase more rentals and build reserves.  The numbers aren't huge in either direction but I would love to get some feedback to see this decision from different angles.

Thanks,

Will

Will Pritchett · Answer

Thanks for the question. I did refinance it and took out some equity. We used that money to buy a third rental and rehab it. My cash flow didn't change much but I freed up some equity to invest elsewhere.

I have been listening to @Jason Hartman on his podcasts and he has some great insight . I have had to learn to see debt differently. I recommend his podcasts in addition to the BP podcasts. He has even replied to some of my posts here. It is like an economics class crossed with a real estate podcast.

I am now refinancing my home to a 30 year note from a 15 to free up several hundred dollars per month that I can invest better.

Please let me know if I can better answer your question. Good luck sir!

-Will Pritchett

Will Pritchett · Answer

Man, those are all great points and questions.  Maybe I should look again at the equity there.  The current rate is 5.25 on FHA loan.  I just closed on an investment property last week at 5% so I would hope to keep the rate close to what it is now.  Going to a 15 year note wouldn't improve my current situation since I am at about a 15 year payoff now anyway.

Selling and taking my equity to a better property is an option but I see more appreciation in this property than in the neighborhood where my other property is (which cash flows more).  I also dread the transaction costs of a sale. I bought this house with almost nothing down so my initial investment is minimal.  I am still a newbie so balancing debt paydown with cash flow and appreciation just has my head spinning a bit.

Our long term strategy is buy and hold.

I am coming at this from a former Dave Ramsey addict's perspective.  I want to use leverage but fear what that leverage can do when used against me.  In real estate I hear about leverage being used to our advantage but I don't hear much about when it works against us.  I am trying to figure out how to hedge my bets a bit and I guess I see that wasted equity as a safety net sitting in that home in case I'm not as good an investor as some of you seasoned folks.

Are there any threads here about those who were overleveraged in '08-'09 that failed or others that weathered the storm?  I just want to be realistic  about both ends of the lever.

-Will

Marco Santarelli · Answer

Hi Eric - you may have a tough time refinancing your property with only $10k of equity in place.  Most lenders are going to want to see about 25% equity in the property before they refinance it.

Continued success!

Jason Hartman · Answer

Thanks @Will Pritchett - Glad you're benefiting from The Creating Wealth podcast! :-)

Will Pritchett · Answer

As to exit strategy, I have only thought about acquiring and managing these homes (and hopefully many more) and one day passing them on to my kids free and clear.

Account Closed · Answer

What is your exit strategy?

Maybe the best thing to do is look at selling it and looking to get something better.

Andy Collins · Answer

what is the rate on the current mortgage

Sam Craven · Answer

I think it depends really.  What are your closing fees, how long will it take to repay those with the increased cashflow?

Do you reset the clock to 30(15) years again?

Perhaps another question you should ask yourself is:

Could I put that 75k of equity to work more efficiently in another property?