Thoughts on this cash refinance?

Question

Hey guys,So i wanted to get your thoughts on this cash refinance deal. I’ve had one of my properties for about 7 months now. It’s been cashing flowing well and my tenant has been good. It currently appraises for $140k and my payoff quote is $71,500. LTV 75%, 7.15% interest. It would still cash flow a couple hundred dollars after the refinance and I’d be able to get about 25k cash after closing costs. That would enough or at least close enough to acquire another property via DSCR. My concerns would be the higher monthly mortgage payment, less cash flow, and higher loan amount. What advice would you give? Thank you.

Margie Cindy Santos · Answer

Hi Eli, every investor is different and I've seen different seasoned investors keep or refinance in the same scenario. It would really depend on your deal flow, income and liquidity. For example, if you have a homerun deal to purchase and you need this cash, it may be worth it. However, if you are already liquid and you don't have strong income or strong reason for the 25k, it might not make sense to refinance.

Chase C Henderson · Answer

Eli,

Another piece of the puzzle to look at, similar to what @Payton Haight was discussing and your own financial situation. Is the cashflow your expecting to receive include repairs and vacancy set backs? While it works today. Lets look into the future, what can you expect your cost to be in 3,5, 10 years? As an example.... When is the last time the auditor reappraised the value for the purposes of taxes (in Ohio we have a 3 year (Triannual) evaluation period on property taxes, meaning they can adjust our property taxes and the amount due every three years and recently a lot of properties in my specific area saw increase between 15% to 35%. (Not to mention insurance adjustment, material cost and interest rate increases).

Another point of investing advice. If you plan to buy another property with 25k you get. Make sure it does at least 1 of the two things.

1. The replacement property/investment will net you at least 7.15% or better cash on cash return. (This covers the 7.15% interest you are paying on 25k loan you are taking out).

2. Make sure you financially are at a place you can afford to take on both mortgage or renovation if they were to become vacant. (Or at least have a plan for where you gonna get the money to cover these cost).

Growth is a great thing, but if you over extend yourself, by the time you notice, it's often to late.

Kristen L Garner · Answer

From a lending perspective, your numbers look reasonable. At 75% LTV on a $140k appraisal, your estimated loan amount would be around $105k. After paying off the $71,500 balance and accounting for closing costs, pulling out ~$25k in cash sounds realistic.

Is there a prepayment penalty on your refi loan?

That said, your concern about reduced cash flow is valid. The 7.15% interest rate is higher than what you may have seen in recent years, but that’s not uncommon in today’s market for cash-out refis, especially with investment properties. If you’re still cash flowing a few hundred dollars post-refi, you’re in a decent position, especially if the cash-out helps you acquire another income-producing property via a DSCR loan.

Ultimately, the decision comes down to your investment goals. If you’re comfortable trading a bit of cash flow now for the ability to scale your portfolio, and the DSCR on the new property still works, this could be a smart move.

Best of luck!

Payton Haight · Answer

Hey Eli, congrats on the successful deal! How did you end up with so much equity in 7 months? Did you buy under market, rehab, etc.

My advice would depend on your specific situation. If you would still be in a strong financial position after refinancing & deploying cash on a new property AND you have a steady flow of deals to buy, then I would say go for it. I would not do it if you would be spending all of your money on another property and spreading yourself thin - that could put you in a bad spot quickly.

Peter Skobic · Answer

Hey Eli, I am a rental investor, flipper and DSCR lender. It only takes me a couple of minutes to run the numbers for you and give you a breakdown of your cash out amount, the new mortgage payment including taxes and insurance and the projected cashflow. Let me know if you want to connect and I will help you analyze the options!

Chase C Henderson · Answer

Sorry about my delayed response I was on Vacation. Even us real estate people need breaks too!!

If your concern is vacancy and keeping up with cost there are a couple tools to discuss in this regard.

I am working on the assumptions you have a couple properties based on your previous messages.

Tool 1- You nailed it is rent increases, these are a tool of every landlord to keep up with cost rising, that being said, your property has to justify the cost or you will create vacancies. I have heard the "Old heads" talk about raising rents 30 dollars a month as no one will move out for a dollar a day, to everyone gets a flat $50 raise till they move out, to others saying take your increase in cost and add your profit margin to it (So if your cost increase $25 a month, then times 25 by your preferred cash on cash return i.e 8% for me. so $25x1.08 and i would increase my tenant rent by $27 that year.

So tool 2 to protect against multiple vacancies is stagger your lease expiration/renewal dates. So if you have 4 property/units try to set your lease to renew with some variance. So unit 1 lease ends December 31st, Unit 2 end March 31st, unit 3 June 30th, Unit 4 would be the last day of September.

*** This will space out when your have planned vacancies or help you prevent a swarm of move outs. This method if your are doing a good job vetting tenants and managing your properties should help stabilized move outs. (This won't prevent non payment issue based evictions, but will give you a planned idea about went to expect move outs. So you don't get caught with multiple voluntary move out in the same month)

Tool 3 is underwrite the vacancy in to your business. So we underwrite that we will only receive 90% of the rents we are supposed to collect aka 90% economic occupancy. Now we do this as we rent work force (factory workers and retail workers) housing in metro to rural Ohio. If your properties are in the premier neighborhood in like Orange County California you can adjust to a lower percentage of vacancy. The point being is we reduce our project revenue by 10% to create an accurate rent number to account for those vacancies.

Tool 4. Utilize equity in the other properties or your home

A great way to protect yourself from cashflow shortfalls is have a emergency place for funding, some organizations will use cash on hand, others will use things like lines of credit. So for instance if your worried about floating a property or 2 if you have multiple vacancies, if you have enough equity in another property you can get a LOC for emergency purposes. The idea being you get the LOC before you need it, so when you do have to cover a payment to contractor on a vacant property, or your tenant leaves in the middle of the night and you need that months rent to pay property taxes you have another pool of money to access and cover your butt. Also, it helps that its generally interest only and at a much much lower rate then a credit card.

*** Don't go spend on the LOC all willy nilly, this could put your whole operation in a bind

There is always levers and tools to solve situations and I am sure there is more then what I recommended here, but remember the reason most business fail is not because they aren't profitable, but because they mismanage their cash and do not have money to meet their liabilities when they come due

Jaycee Greene · Answer

@Eli Kim Have you run your numbers on a cash out refi to figure out your DSCR? Also, are you looking to do an HML or do a loan with a local bank/credit union?

Eli Kim · Answer

Thank you! I bought it under value. Thanks for the advice. I would still have a pretty good cushion if I were to buy another property.

Thoughts on this cash refinance?

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