15 year or 30 year mortgage with a story?

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15 year or 30 year mortgage with a story?

Investor · CO · Member since 2017 · 26 posts · 3 votes

Hello All, I am new here to BiggerPockets. I know there are a ton of posts on 15 year vs 30 year mortgages, but I did not find one that fit my scenario.

I currently own a Single Family rental in Boulder, CO. It used to be my primary and I refinanced to a 15 year in 2011 at 2.65%. I have almost no cashflow on it. Now that I want to build a rental empire, I am tore on doing a refi to 30 year at 4.7% to have the $1350/month in cashflow. I am really torn on going to a 30 at a much higher interest rate, but I can do a lot with the extra cash. Any advice on this would be helpful.

Chance

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Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

The very first thing you need to do is sit down and learn the value of cash and how to best invest in real estate. Your present property is not a investment.

Your $400K equity is costing you about $3300/month in lost income due to the fact that you are ignoring it's opportunity value. It's creating negative cash flow and deluding any appreciation you are getting.

This is a bad, no a terrible investment. Considering you believe it is cash flow negative by $100 and I believe it is closer to $3400 negative cash flow I would sell it immediately. Pulling out the equity will not work on this property, it will only compound the problem.

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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
To add to that, my other idea is to get a LOC loan on my 15 year if I need it and forego the cash flow altogether. With my tenants paying down about 18k per year right now and the 10+% appreciation per year, it seems a bit extreme to refi for the extra 14k in cash flow.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
Last piece of info that is probably pertinent, I currently have a little over 400k in equity and the property was appraised for about 690k a year ago.
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
9y
Here are some questions to ponder...
Refinancing - Why do you need the money now? And is does that need to have it now outweigh the potential cashflow when the loan is paid off? Remember you will have closing costs to consider too if you refi.
HELOC - What rate would you get on the HELOC and what return could you get investing that money elsewhere? (I have no interests here... If you are in the market for a HELOC, UMB has a program with no closing fees. So that could be an option.)
Calcxml has great calculators to help figure out these exact scenarios.
Personally, I'm not a fan of tying properties together (ie, using a HELOC on one property to purchase another)... or for consolidating debt with a HELOC (buying cars, vacations, paying off loans etc). I like my investments as their own entities. Others will disagree or it may not be feasible for your situation.
But I am a fan of having access to cash quickly to close a deal or backup reserves to make repairs (that's how we use ours). If you go the HELOC route, get it paid down ASAP as this is a second mortgage on the original property.
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
9y
And know that we are due for a correction (or level off) in our market soon (won't tell it by this seller's season), call it just a gut feeling.
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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
9y
@Chance Noffsinger what was the original reason why you received the 15 year mortgage? Was there a reason behind the decision? As in, did you want to have it paid off in 15 years because that timed with your retirement or other financial goal? Goals change, life changes, and refinancing your mortgage payment can help with those changes. This is more of a personal question because I can make a case for an against if I knew all of your financial goals. But since you already know your own goals then just answer "do your current goals trump the original goal when you got the 15 year mortgage"? If the answer is yes, then go with the refinance. If you do choose to refinance, I would recommend analyzing the transaction to try to see if you won't refinance again. I'm not a big fan of people paying closing cost over and over. So if you don't take cash out right now...will you regret it? If the answer is yes, then do the cash out loan too. Maybe having a cash flow of $300 is just fine if it allows you to purchase 3 or 4 other investment properties. Just do your best to analyze your goals and the answer will be clear. Good luck!
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
Thanks Whitney. The cash flow would 100% be used for additional properties. I am not 100% certain on HELOC rate, but would guess in the 4.5% to 4.8% range.
Honestly, if there is a leveling off here in Boulder soon, I may just cash out on the property altogether. I could do a lot of investing/purchasing with the equity. My gut feeling (and also Excel worksheet) is to hold the 15 year at this really low rate. I managed to confuse myself when I saw that there are 100s of forum posts saying always do a 30 year over a 15, but justifying a 2% increase in interest rate to generate a little over $1000 in cash flow didn't make much sense to me.

Thanks for your input.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
Andrew, the reason for the 15 year was that it was my primary residence and the rate of 15 year was substantially lower the my original 30 year. At the time, I didn't know that it would ever become my 1st rental property. My wife and I both have very good jobs, so we don't need the cash flow for anything in particular.
The rest of your post does make very good sense though. Our goals have massively changed recently as we have decided to jump into real estate with both feet. Right now, I am just educating myself as much as possible and hope to buy my next property within 3 to 6 months.
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Whitney HuttenPro Member
Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
9y
Andrew offers up some great advice. Point is, you need to understand your goals, which can be very confusing after hearing everyone else's strategies.
Leveling off is part of the cycle. I think real estate around here is such a great investment. Easy rent, easy to move if needed, holds value well (I'm assuming you are in Louisville).
You are in a very lucky position to be cash flowing a property on a 15-year mortgage. And both have awesome jobs. That's awesome! So what do you want from real estate that more properties will give you aside from just the one rental?
As far as heloc vs refi, would I be correct in assuming that your question is really how to tap into that equity there to start your business?
Not to confuse you more... but with 400K in equity (assuming you could access all of it, since most banks would only lend on a 70-80 LTV)... and assuming I did my math right based on what you've shared, you could have $260K ish to start your business. Depending on the area/market you could go in as a cash buyer and then refinance out (perhaps only leaving 20% down or none depending on how you did it).
Again, I'm not a fan of tying properties together like that, but if you connect with a great lender who can show you the ropes, it's not the worst thing to do if you understand and can mitigate the risk. You could start your business without having to cash out your first rental.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
I actually am not cash flowing on our existing rental. I am just barely breaking even or possibly losing $100/month by the time I figure in cap ex.
Honestly, what my wife and I want out of investing is more financial freedom, to run our own business, and a laundry list of other reasons. I have been in sales for 20 years and I am tired of making 75 cold calls every day. .
There is so much opportunity here in CO in real estate and I get very excited thinking about finding those hidden gems of houses. . It keeps me up at night thinking about hunting for that next house.
I never thought about pulling all our cash out of rental and being cash buyer. Very interesting idea. I'd prefer. What I would like to do is look more into Brandon's. BARRY strategy with a private investor on next house. Since I am so inexperienced, I assume I'll have to bring at least a little money to the table to seriously be considered by a partner. . Any thoughts on that strategy?
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Chance Noffsinger , you said you and your wife have very good paying jobs. Can you save up like crazy to afford the downpayment on another house? Our market is ridiculous, but there are still deals to be found.
Are you currently looking for another house? How would you purchase it if you found it tomorrow?
What I'm reading from your posts is that you have two houses, one in Boulder and one in Louisville. Those are both expensive areas. Are you looking to stay in your immediate area? Longmont real estate is rapidly appreciating, and Loveland is on it's way up too. Even Greeley is going nuts. but all three are still much more affordable than Boulder and Louisville.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
BARRY strategy should have said BRRRR. Sorry about that.
Mindy, no, I wouldn't even consider another property in Louisville or Boulder unless someone was practically giving it away. I am keeping options open to rest of state, but not in the extremely expensive zip codes. Broomfield County would be good. Close to home, so easier to manage.
As far as financing next deal, we would either save the cash and/or access a LOC on our Boulder rental.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
The very first thing you need to do is sit down and learn the value of cash and how to best invest in real estate. Your present property is not a investment.
Your $400K equity is costing you about $3300/month in lost income due to the fact that you are ignoring it's opportunity value. It's creating negative cash flow and deluding any appreciation you are getting.
This is a bad, no a terrible investment. Considering you believe it is cash flow negative by $100 and I believe it is closer to $3400 negative cash flow I would sell it immediately. Pulling out the equity will not work on this property, it will only compound the problem.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
You aren't far off, Greg. I went back to my spreadsheet for property and I am losing $2400/year currently. The problem I have with selling it today is that it has appreciated 15% per year for last 3 years. This year looks like it will level off to single digit appreciation, so selling soon may be a good option. Although it appraised at 690k about a year ago, local comps should have it selling around 720k. Balance on loan is about 280k, so roughly 440k in equity. My current tenants have a lease until May, I believe, which gives me another $5500 in equity. So 445k in equity, minus realtor commissions leaves me with roughly 400k net.
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Noe Arellano
Investor · Greeley, CO · Member since 2016 · 10 posts · 4 votes
9y
FYI I use Credit Union of Colorado and they offer Helocs for only 4%.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
Well, to Greg's response, I just joined a local REI meetup group (thanks, Whitney) that is meeting tonight. I'd like a few more opinions on my current property at the meeting tomorrow night.
Thanks for that info Noe. My current CU doesn't offer LOCs on rental properties.
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Christopher Giannino
Real Estate Agent · Hamilton, NJ · Member since 2013 · 464 posts · 311 votes
9y
@Chance Noffsinger I think it all depends on your investing strategy.. Are you more interested in owning properties free and clear or are you looking to build up your portfolio and leverage yourself?
Although I understand that its a scary thought to refinance into a loan in which the rate is over 2% higher than the rate you currently have but it might be worth it if you'll be able to cash flow $1,350/month. This is a significant amount of cash and this can definitely help to build up a rental portfolio.
Since rates are still pretty low, I would look to refinance. Just make sure you do your due diligence by making sure the numbers work and that everything makes sense.
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Matt M.
Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
9y
Where do you want to be in 10, 20, 30 years etc? How are you going to get there? Start there and work backwards.
If you plan on keeping the home, changing the loan will increase your total interest payments, BUT it will also free you up to expand. You could use that extra income to qualify for a larger loan amount.
While the BRRR strategy is attractive, you will have to find a "deal" that will fit into the model. With deals being in short supply, especially around Boulder, you are going to have a tough time finding one. Do you think you could put together a 25% down payment on a decent home for a rental?
Boulder RE prices are not going anywhere but up. I personally would refi so that you cashflow, and then would look to qualify for the next rental.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
I agree with both of you, Matt and Christopher. I just need to convince the wife. She is very emotionally tied to our Boulder property.
Matt, I most likely wouldn't consider Boulder for a next property. That ship has sailed in my opinion. The cash flow to property value just isn't there any more. I believe I could come up with enough downpayment money to purchase at least one home per year outside of Boulder (i.e. 400k and under) and might consider a partner on first few deals to accelerate things.
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Thomas Fortune
Investor · Virginia Beach, VA · Member since 2013 · 84 posts · 26 votes
9y
My 2 cents:
With that much equity in the property, I'd opt to keep your 15 year with that low of a rate, and then setup a LOC on 75% of your equity. You may have done this, but look at a side by side comparison of the next 10 years if you keep the current 15 yr vs refi on 30 year. My guess is that your total gain (primarily in debt paydown) will be larger when keeping your 15-year.
The only reason I can see to refi to a 30 would be if you are bleeding cash and NEED the extra cashflow. If you can afford to break even on cash flow in order to gain more over the next 10 years in debt paydown, that would be my personal pick.
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Brian GarrettPro Member
Westminster, CO · Member since 2016 · 68 posts · 22 votes
9y
This has been a great conversation. I'm in Westminster and just starting to get educated about this process. Many of the strategies discussed here I like (Longmont especially). I have a friend through another club/association who is a realtor who is willing to help show me the ropes and he was suggesting Northglenn as a possible avenue to invest in. Best of luck Chance. Hopefully I won't be too far behind you on some purchases.
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Account Closed
Insurance Agent · Member since 2015 · 191 posts · 124 votes
9y
@Chance Noffsinger
The difference between your current rate and the 30 year rate should really not be relevant to your decision. You are currently making $0 off new real estate investments regardless of your low rate.
The decision should be based on the 30 year rate (4.7%) and your expected rate of return form investing. If you believe you will make a more than 4.7% return refinancing is a good decision. If not it is a bad decision.
If you want to start growing your real estate holdings as soon and quickly as possible I am not sure why you wouldn't do a 30 year cash out refinance in which you add whatever money you want today to the longer amortization at the fixed 30 year 4.7% rate. This gives you cash up-front and eliminates the interest rate risk associated with a HELOC.
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Chance Noffsinger
OP
Investor · CO · Member since 2017 · 26 posts · 3 votes
9y
Mike, I hadn't considered a cash out refi and I think it make the most sense. At a 75% LTV, there would be plenty of cash to get started on at least 2 new properties.
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Jonathan Wooten
Cleveland, TN · Member since 2016 · 18 posts · 4 votes
9y
Depends on your goals. If you're looking to build an empire, you will die in debt (that's not a bad thing nor bad debt) you will be hungry for more deals in the future and if you can show cash flow returns of 1k per month vs 2.5% returns. I'd go with cash flow.
Also 4% is still great. If you end up waiting, you could be hit with a 6 -7 rate and that's no fun.
That's in brief ...my opinion
Also, don't forget that Denver is at its peak or close to it so that should have weight in your thought process.
Good luck man!

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