How much to refi?

Question

Hello BP,

I have a situation and I wanted to see what people suggest.

I recently purchased an out of state rental property for $94k, which includes closing costs.  In my original projections after doing a refi I was planning to cashflow about $250/month after all expenses.

However the appraisal on the property came back with a $123k value and my lender is willing to refi upto $89k. If I refinanced my cashflow drops to about $100/month.

So would you suggest option A: roughly $20k invested into the property and $250/month cashflow?

Or option B: $5k invested with

Adam Bartomeo · Answer

Based on the info given it is a No brainier! Refi!

$15,000/$150 = 8.3 years.

Why would you wait 8.3 years when you can have it today?

Take the $15,000 and get another property that cash flows at $250 and you will have a total of $350.

Powell Chee · Answer

@John Santos  Thank you kindly.  Send me a pm and I'll send you my lender's info.  The product I used with them is called a delayed finance or delayed refi.  It has to be completed within 90 days of the purchase.  Sounds like something you might be interested in.

Powell Chee · Answer

@Patrick Squires I went with the refi of 70% of $123,000, which meant my cashflow was going to be low but I'd have less cash in the deal.  Luckily my projections were conservative and my property manager was able to get higher rent than expected so I'm at about $200 in cashflow a month with about $8000 of my cash into the deal.

What's your situation?

John Santos · Answer

I was in the mortgage business between 2001 and 2007 and never heard of a delayed refi. Always learning :)

Thank you for your help @Powell Chee

John Santos · Answer

@Powell Chee congrats man! I am in the process of closing on a property I picked on an online auction. So I did have to pay cash as well. I would like to ask you, how did you find a lender to do a cashout refi right away? I thought there was a seasoning requirement of 6 to 12 months.

In other words, be able to refinance cash out (since it was purchased in cash) 6-12 months after purchasing.

And fyi I think you picked the best choice... going with 70% LTV so you have more cash on hand to continue investing.

Powell Chee · Answer

@Andrew Johnson @Dan Krupa @Cliff Harrison Thank you all for your posts.  As you probably noted, the original post was over a year ago.  At the time I was deciding how much to refi out based on a conservative projection of my numbers.

Without getting too deep into the numbers, I decided to refi out as much equity as I could and likely lower my month cashflow.  In essence I kept about $8000 of my own cash in the deal and now cashflow about $200/month (I get higher rent than my conservative projections).  I'm at 70% LTV since my loan is about $86,000 and the house is valued at $123,000 and I would say the house is in a solid B+ neighborhood.  For me, I'm happy with the results and am looking to repeat the process.

Cliff Harrison · Answer

@Powell Chee - if you have experience with other rentals and have estimated your own expenses and have a reasonable reserve fund, then I would pull out as much cash as you can and still have positive cash flow.  If that is not the case, you are more than likely underestimating your long term expenses, and I recommend you be more conservative.  If you are using a turnkey provider's estimated cash flow directly, it is VERY LIKELY your actual expenses over the long run will be higher than they have estimated.

Dan Krupa · Answer

@Powell Chee, option B every day of the week! Refi. As long as you have appropriate reserves and that $100 cash flow truly accounts for the appropriate amount of capX, repairs, management, etc... Don't underestimate those.

Also, I am not sure of your whole financial situation but don't over leverage.

All that being said - Time Value of Money! You can deploy that extra capital now while interest rates are low. If you plan is to sit on it - go option A. However, I recommend you invest in something else.

Best of luck to you.

Andrew Johnson · Answer

@Powell Chee Playing devils advocate here, it's your first property so I don't know how eager I would be to say "leverage yourself to the hilt!"  What if the market goes down and you have to get out of the investment?  What if there's an unexpected cap-ex expense that you didn't budget for?  What if it's harder to rent that you think when a unit ends up vacant?  I'm sure they supplied T12s when you purchased the property but I always assume that expenses are going to be more than I budgeted.  If you drop your cash-flow to $100/month you basically end up with no cushion.  That being said, if you have $100K in the bank as a "just in case" fund my point about risk might be moot.

What I would suggest is the following.  Look at your projected income, expenses, etc. and estimate what your taxable income would be.  Make sure that depreciation and mortgage interest payments match that or maybe exceed it a little as mortgage interest should degree over time and hopefully rents will raise over time.  The net result would be a property where cash-flow equals post-tax cash-flow.

Powell Chee · Answer

@Patrick Squires Sounds like you have some good options in front of you but that it's just a matter of how you'd like to finance it.  Whatever way you choose, I'd suggest just make sure you can repeat it later.  That way you can continue to grow.

I'm under contract right now for a house in Memphis which I think will be very similar to the one I did above which is in Kansas City.

Let me know how your decision turns out.

How much to refi?

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