Should I cash refi my 3.5% interest property for 4.65%?

Question

Ok here is our situation we are still new to real estate and investing and just purchased our 3rd rental and want to keep moving forward.

Our first property we bought in WA state in 2012 for 130k and now is valued at 400K+ we have a small studio air bnb (converted from a 330sqft garage) averaging $1900-$3000 per month while we are still living in the rest of the house. We also just launched the remaining of our house on air bnb and received our first booking starting in sept since we are moving out. We are expecting to have a gross income of $3000 - $6000 a month on this property. Currently our mortgage plus all taxes and fees equal to $1100 on this property so this is a very hot rental for us.

My question is would it be wise to abandon a 118K loan at 3.5% interest rate and do a refi cash out at 4.65% for 300K and take that 182K and invest it into more properties or leave it as is.

A 300K loan will raise our monthly expense from $1100 to $2200 on this house which is still well under what the property is producing in passive income.

As a investor and a desire for acquire more properties it seems like it is the right thing to do. What do you guys think?

Thomas S. · Answer

If you can not get a HELOC then cash out is absolutely your best option. 300K invested at 10% (opportunity value) is worth $2500/month. That is how much you are presently losing monthly having dead equity dying a slow death in your property. With an additional cost of only 1K per month you would be crazy not to access that money immediately to reinvest.

Equity in a income property is where cash goes to die. If you wish to continue expanding your investments ignoring the fact that you have all that money doing nothing is a sin.

Arun Iyengar · Answer

@Andrey Gorokhovskiy, if you can be cash flow profitable with the new loan (larger amount and higher rate), then you will have freed up cash to buy more. My approach is to fast forward to a steady state on the new purchase (if there is any value add work) and then add the cash flow of the new property to the old one with the larger loan and if that is equal or greater to your current cash flow, you have a good target.

I am a big fan of multifamily properties and continue refinancing them anytime my equity goes over 50%, bring it down to about 30% (or the least the bank will allow me to be) and take the delta and purchase more properties.

Hope this helps.

Mike Dymski · Answer

Don't step over dollars to pick up dimes.

Andrey Y. · Answer

AirBnBing is FAR from "passive" income.

Andrey Gorokhovskiy · Answer

@Andrey Y. for sure, since it is a short stay rental and nightly rates changing with demand it is a little hard to have defined income. Since we launched the last year has been solid  - Since we have lived on the property it only would cost us around 50 extra a month for water and utilities from what we were already paying. Once both air bnbs are up and running I am calculating about 1700 a month for all fee, bills, utilities, management and cleaning. Every stay there is a extra cleaning fee that the customer pays that I pay directly to my cleaner.

Once we move out it will be a little more clear when we have 2 air bnb rentals. I currently do have a HELOC on this home that I have been pulling and putting back for flips and projects but its only about 70k. With the 182K I would want to purchase either a multi family property with 20% down and some repairs or a couple SFH's.

Its tough there are so many options, just have to figure out which one will work the best with what you want to do and your overall goal.

Andrey Y. · Answer

Got it. If I may ask, what is the NET income (after mortgage, expenses, vacancy, and management fees) on the property? This matters in your refi analysis.

I am going through something similar as you. I have three properties with 3.25%, 4.375%, and 4.5% interest rates. The first I just slapped a HELOC on. I think this may be a great strategy for you. Use the money only if a really good deal comes along. Right now, I am looking at a 5.125% with 0.5 points for the refi on the others, and I am honestly not sure if I will go forward with it.

Andrey Gorokhovskiy · Answer

@Andrey Y. I guess it is different for different people. It is passive for us since we have a management company & and cleaner that takes care of all air bnb needs. Thanks for your advise regarding air bnb.

Should I cash refi my 3.5% interest property for 4.65%?

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