Should I Refi to Buy?

Question

Hey all,

I would really appreciate some advice on this, both on the refinancing of my SFRs and on a two duplex deal. I'm considering refinancing four of our SFRs to pull some cash for a down-payment on two duplexes. The duplexes are both two stories and on the same lot. All four units are occupied and rented for $550. I think they are under market rent and can bring $600-$650, but I'm not factoring that in to my calculations. That extra rent will be a bonus. Thanks for any advice.

1. First the refi...

Four single-family rentals we have built equity in by repairs. FYI values are $30-60k. Rents are average to low. We plan to increase rents total by $100/mo.

Current cash flow ~ $1,195/mo

Refi cash flow ~$880/mo

Refi will pull ~$55,000

2. Now the deal...

Financing:

Potential purchase $80,000 per Duplex $16,000 down (20%)$64,000 @ 5% = $345/modouble this since there are two Duplexes$690/mo debt service for both Duplexes

Income:

$26,400/yrEach unit is rented for $550/mo

Expenses:

Taxes ~$4,000, Insurance ~ $1,600Lawn care/snow removal ~ $2,400Maint. reserves ~ $2,400Factoring a 7% vacancy (7% is conservative for the area)

NOI ~ $14,152

Cash Flow: $5,872$14,152 - $8,280 (debt service) = $5,872

ROI: 18%

Cap Rate: 8.8%

COC: 40%$14,152 / $35,200 (downpayment + closing cost) = 40%

3. Cash Flow...

We factor in $100/mo per building for reserves when doing cash flow.

Current cash flow ~ $1,195/moRefi cash flow ~$880/moRefi plus the duplexes ~ $1,370/mo

All right, tear it apart!

Seth Kitchka · Answer

I shouldn't try to post and do math on my phone at the same time... The NOI after the "refresh" would be $18,952

Joshua D. Thanks, we'll see what happens. We have a great lender that I think will make it smooth if we decide to do it.

Joshua D. · Answer

@Seth Kitchka

I see! Well I hope the deal turns out great.

As far as a refinace my wife and I just did a cash out refi on our primary that we baught 7 months ago. Hopefully it will be a rental again in a few months.

Anyways it was a rather smooth process for us.

Joshua D. · Answer

@Seth Kitchka

Why not sell the least proforming house and 1031 into the duplexes. Then you still have great equity position in your houses and cashflow from the duplexes

You cannot calculate risk on a spreadsheet.

William Pesce · Answer

Sorry man I just saw your second post on your correction

William Pesce · Answer

Forgive me if I'm reading this wrong but I think your cash on cash return is incorrect. It would $5,872 / $35,200 which is a 17 percent return because the $5,872 is your actual cash flow. With that being said this equation does not include principle being paid down on the loan and depreciation of the property. I would say if you are in an appreciating market that it may be worth it but it seems to me like you are currently receiving $1,195/mo and after your purchase of the duplexes you would be getting $1,370 so you would only be increasing your cash flow $175/mo. So ultimately you would have to decide if your willing to take on 4 more tenants for $175/mo and the deciding factor for me would be how well the market I'm in is appreciating at this time but counting on appreciation is a little bit risky imo. Hope this helps