How to determine the best Cash Out to take? (Capital vs Cashflow)

[Jared McCullough]

Fairly new to this and although I understand how to run most of the critical calculations to analyze the deal the part I am struggling with is understanding the best methodology when it comes to the "Refinance" portion of the deal.

There are (2) extremes:

Option 1: Take the full LTV that is offered even if it means running cash neutral/negative as it is buying the next house and the combined income of the (2) houses versus one is more than just the one. (i.e. 2 houses funding 1 mortgage) In this model you keep snowballing until you determine you have reached the limit that you can handle.

Option 2: Set a "Cashflow" you are wanting to get from each unit then backcalculate what the max LTV is you can use to still meet the desired cashflow. (i.e bank may offer 80% LTV but to meet cashflow goal you can only take 60%)

Option 3: Somewhere in between these (2) 

Skip the math below if you have a generalized approach of how you would recommend. If you would like to see my specific example see below.

Now to my real world example that someone can hopefully help me decipher (i.e. My business partner is all about getting as much capital and he keeps telling me that it doesn't matter because your are always at least 1 house ahead but I am struggling to wrap my head around the numbers)

I was HML for the first house purchase $25,000 and plan to withdraw it after the 3rd house closes and refinance goes through.

House 1:

Purchase $25,000

Apprasied: $65,000

LTV 80%

Max Refinance $52,000

Payment: $430 (15 YR @ 5.7%)

Rent $850

House 2: (Duplex)

Purchase $40,000

Apprasied: $75,000

LTV 80%

Max Refinance $60,000

Payment: $487 (15 YR @ 5.4%)

Rent $1300

House 3:

Purchase $20,000

Apprasied: $40,000

LTV 80%

Max Refinance $32,000

Payment: $260 (15 YR @ 5.4%)

Rent $600

After these (3) deals are done I can then pull my $25K out and have $59,000 of gained business capital to keep doing the process with...but I suffer on monthly cashflow.

House 1 $25 ----> $52

House 2 $52 - $40 = $12 + $60 (refinance) = $72

House 3: $72 - $20 = $52 - $25 (My money) = $27 + $32 (refinance) = $59k

Gained Business Capital = $59,000

Monthly Rent = 2750

Monthly Debt = 1177

Gross Cashflow = 1573

The other thought would be to set end business capital goal with the intent to increase gross cashflow

House 1:

Purchase $25,000

Apprasied: $65,000

LTV 69%

Max Refinance $45,000

Payment: $365 (15 YR @ 5.7%)

Rent $850

House 2: (Duplex)

Purchase $40,000

Apprasied: $75,000

LTV 53%

Max Refinance $40,000

Payment: $324 (15 YR @ 5.4%)

Rent $1300

House 3:

Purchase $20,000

Apprasied: $40,000

LTV 80%

Max Refinance $25,000

Payment: $203 (15 YR @ 5.4%)

Rent $600

After these (3) deals are done I can then pull my $25K out and have $59,000 of gained business capital to keep doing the process with...but I suffer on monthly cashflow.

House 1 $25 ----> $45

House 2 $45 - $40 = $5 + $40 (refinance) = $45

House 3: $45 - $20 = $25 - $25 (My money) = $0 + $25 (refinance) = $25k

Gained Business Capital = $25,000

Monthly Rent = 2750

Monthly Debt = 892

Gross Cashflow = 1858