Should I sell my portfolio of rental properties or refinance them

Question

Hello I'm a young real estate investor and I'm torn between selling my portfolio of 11 townhomes or Refinancing them to save monthly. When I purchased these I agreed to pay a higher interest rate just to get in the investment game now the rate is eating away at my profits. Now I'm wondering should I just sell these and move on to another investment? Or refi save money and keep them for the long haul. I need other investors to help me decide.

Thomas S. · Answer

If you plan on becoming a successful investor you need to understand the value of cash/equity. Dead equity reduces cash flow on a property and turns the property into a liability. You do not want to pay off or leave equity to die a slow expensive death in a rental property. That is a home owners mentality.

If you do not pull your money and force it to earn it's keep you are losing far more money than you will ever make through investing.

Are you a cash hoarder or investor..

Stephanie P. · Answer

@brian whittington

There are a couple of things to consider.

• Are you conflicted as to whether you want to be a landlord or not?  If you do, then refinance the loans to a reasonable interest rate and keep the properties; if you don't, then sell.
• Do you want immediate cash or long term wealth.  If you want/need the cash, then sell. If you want to have a passive income for when you're old, keep the properties and let someone else pay them off (tenants).

Hope this helps,

Stephanie

Thomas S. · Answer

If you do not understand the value and negative impact cash/equity has on a income investment property you really have no idea what your true cash flow is. You could easily be losing money every month as a hobby investor and have no clue.

For every 100K in dead equity you are losing the opportunity value of that cash which is worth a minimum 10%. You are losing out on a 10% return to save 4% on a mortgage. You are in a slightly different situation with a high interest rate which would be an immediate plus for you to refinance with maximum leverage with a 30 year term. Your goal should never be to pay off a income property if you want maximum cash flow.

When calculating true cash flow the first deduction you make from your monthly rental is $866 for every 100K in dead equity you are hoarding in your property. Add that number (for every 100K) to all other expenses and you then have your true cash flow making it easy to decide if you refinance/reinvest the equity or sell.

Equity decreases cash flow it does not increase it. If you want maximum cash flow you need to have maximum leverage.

Hal Thompson · Answer

@Thomas S. I can't agree with your thinking. Leverage has its own risks. If you constantly refinance out your equity in a rising market, and then use that equity to reinvest in the same market, it is not too dissimilar to selling your properties, taking the cash, and then rebuying into the market at the current market rate. The cash you obtain from your refinance can be used to purchase new property, but only at current market prices. If you will take that cash to explore opportunities in other markets, that might be a different thing. But if you get overlevered and rents drop, and your financing costs stay the same, you have a problem. If rents drop, home prices drop and interest rates rise (heads up!...it's coming), then you have a really, really big problem. The refinance at every opportunity crowd will take a bath if the market takes a dive.

Daniel Johnson · Answer

Thomas, very well spoken......

Brian Whittington · Answer

The deal to pay it off quick I would not be able to get again no bank will do that. But I could get other investments that are more profitable with more cash right now. When you say dead equity what are you referring to? These properties make me a monthly income I'm not losing money on them. I'm just trying to decide if I want to have that extra income 7yrs from now or take the cash now and reinvest in other types of realestate.  I'm not getting out of the landlord business all together I've been in it for 10yrs I love it.

Josh Rowley · Answer

Another idea may be to refi and pull out some cash and lower your payment at the same time.

Josh Rowley · Answer

Another idea may be to refi and pull out some cash and lower your payment at the same time.

Lynn McGeein · Answer

Just wanted to add in your consideration, how hard would it be to replace them?  If there are many deals out there approximately the same, sell, take the profit, invest again if you wish.  If it would be difficult finding as good a deal again if you sold, think carefully before deciding to sell as you may not be able to get back in without spending more.

Brian Whittington · Answer

if I sell I could make a little bit maybe around 75-100k clear  but if I keep and pay off they can make 4500 per month so I'm torn either try to get the lump sum now or wait it out and benefit in the long run.

Should I sell my portfolio of rental properties or refinance them

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