To Refi or Not?

6 Replies

Here is my situation:

Bought a house in 2012 for 230,000 put down 20% and owe around 177,000.
The area has appreciated greatly and the house is currently worth 350,000.

We currently use this house as a rental property and also own another rental property and a primary residence.


Can you give me some advice on using the equity in my rental to buy more rentals. Is that a smart decision?


If I do refi, are there certain terms I should be looking for to get the best deal.

I really appreciate your input.

Gerry

Great topic! I'm interested in seeing what the more experienced investors will suggest. 

Originally posted by @Gerry W.:

Here is my situation:

Bought a house in 2012 for 230,000 put down 20% and owe around 177,000.
The area has appreciated greatly and the house is currently worth 350,000.

We currently use this house as a rental property and also own another rental property and a primary residence.


Can you give me some advice on using the equity in my rental to buy more rentals. Is that a smart decision?


If I do refi, are there certain terms I should be looking for to get the best deal.

I really appreciate your input.

Gerry

It depends on how you define what a smart decision is for you ? It could be borrow at 5% to make 10%, higher, lower, etc, etc.

Its all about managing your cash flows minimize the downside and maximize the upside.

Gerry,

What is your cash flow on the rental property you're proposing to refinance?  Will the refinancing of the appreciated value of your rental cause your debt service costs to increase and put you in the red?

Just food for thought.  I had similar questions on my first round of refinancing.  I needed to tap into some of the equity created from the appreciation for improvements.  Luckily I was also able to get a better interest rate to lower my mortgage payments and increase my overall cash flow.  It was a win-win for me, but it was a limited amount of cash out.

Split decision on this one.  I would say yes, so long as the property that your are going to do a re-fi on an take equity out of can still service the debt.  No if the re-fi property can't carry the new debt load.  I have had closings run over 90 days, so you don't want to be paying the difference out of pocket.  Also, if you are pulling equity out, then you will end up putting less of your own cash into the next property, potentially increasing your cash-on-cash return.

It really depends on what the numbers support.  Always estimate your numbers leaning towards the worse case scenario.  


Bought a house in 2012 for 230,000 put down 20% and owe around 177,000.
The area has appreciated greatly and the house is currently worth 350,000.

 Gerry,

Another idea struck me that might be worth considering in your situation.  If market rent did not increase with the increase in the property's appreciation then a refinance may reduce your cash flow and, by association, your cash on cash return.

In this scenario, it may be prudent to sell the property to extract the tied up 173K in equity and accept that you've made 273% profit on your original 46K down payment.  Nice job!

Now, you can invest your newly liberated 173K into a monster 865K multiplex property that should provide you with a higher cash flow.  Alternatively you could split the down payment into 4 similar sized properties to stay within your niche at, on average, 216K  with a familiar 43K down payment a pop.

This move would help you redistribute your equity to help you maintain a solidly leveraged position while ensuring a positive cash flow.

Either way, great pick on the initial property!  Great problem to have.

does this valauation seem sustainable long term? I would consider selling the property andreinvesting if that makes sense. If the rental rates have not increased in line with this valuation then the property might not cashflow anymore and pose a lot of difficulties down the road....

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