Negative Cash Flow after Cash Refi Strategy

[Mark-Anthony Villaflor]

Good morning BP members! I'm interested in getting a couple more properties while rates are still low. The downpayment for 1-3 new rentals would come from a cash refi I'm looking at doing on two properties I purchased in Texas in 2012/2013. There's a decent chunk of equity built in given the appreciation in the market during that time but with the larger loan I'll negative cash flow by about 300 a month (includes PITI), see below.

4807 Pachuca Court Dallas, TX 75236 purchased 2014 At purchase 80/20 LTV

• 115,000 original purchase price
• 86,500 current loan, 4.5%
• 1250 current monthly rent

2018 Under 75/25 ltv cash refinance

• 165,000 appraisal likely to come in
• 123,750 loan 75%
• 123,750-76,132.45 (current balance on existing loan) = 47,617.55

1. I’m just curious how you view negative cash flow on a strategy like this. Do we just assume that the negative cash flow will go away once inflation and rents increase? When analyzing should I look at the cash flow between all the properties rather than just one by one.

I’m not banking solely on cash flow and am considering the negative cash flow as an “out of pocket” investment as a way to be able to purchase the additional property. I wouldn't be able to come up with the cash for a downpayment to expand my portfolio. I figure the appreciation on the new property and the one being refinanced would make up for the negative cash flow. Also a positive cash flow on a new property would help my overall cash flow across all properties. 

2. If I did a cash refi and then realized I couldn't handle the negative cash flow, I could always just do a 1031 exchange a year or two later. But would it simply be better to just do a 1031 now instead of a cash refi?

3. What am I missing in my analysis and considerations?

4. Is it normal to go negative cash flow on a property that gets refinanced when trying to pull out equity from appreciation?

Any and all feedback and help would be appreciated! 

Love from the Philippines!

[Thomas S.]

In my opinion you already have negative cash flow based on the opportunity value of the dead equity in the property. You are paying a very high price already to "buy" your cash flow. This property is no longer worth holding and would be one I would be definatly be selling now while markets are still high. It will likely never produce positive cash flow. This leaves your return on equity so low it is not worth the effort  to hold.

Buying cash flow is not investing in my opinion.