Need Advice! Refinance Current Rental or Purchase a New One?

Question

I currently have a rental property that I used to live in while attending college. My interest rate is 7%. I would like to purchase another rental property, however, I'm not sure if I would be better off refinancing my current rental home first to try and get a lower rate or just save up for another rental. The rent I am receiving just covers the mortgage. I bought it for $82,000 and currently have a balance of $71,000. Does anyone have any suggestions about what my next step should be? Should I focus more on the rental I currently have or pursue another rental? Any ideas would be greatly appreciated.

Mark Fedorov · Answer

Most banks will be looking at 130% of just the loan payment. Anyway, by reducing your interest rate, and bumping up rents 2-3% every year, you will find your next loan application will be easier because you will be actually making cash every month.

Luke H. · Answer

that's the spirit! Ur Welcome. I read the post about not rasing the rent, good tenant. After a few years, i would absolutely raise it. Let me ask you this, do you think they would leave if u raise it $10.00- $20.00 more a month? That's $120+ a year my friend. Keep the votes coming, lol!Enjoy!

Luke H. · Answer

Thanks for your vote! The lengthy process and crudey terms make it difficult to borrow on an investment property. It's like they dont want you to make money or something ..anyways...I suggest you buy cash at first till you get credit, then max out your credit to buy properties.Then put all (money) you can into paying it down. To buy another 1.Remember, always positive cash flow! Have 'unforeseen contingency ' backup cash at hand.Think of it like a snowball going down hill. Eventually you'll be able to buy cash or credit.Speaking from experience =)

Mark Fedorov · Answer

A re-fi for a investment property is more difficult, they might want to see your schedule E's for the last two years. If your cash out of the building is 1.3 times the mortgage payment, you should be fine (that is what they call the Cash to Debt ratio), assuming that you own this in your name or you co-sign the note with the owning LLC, your income will sweeten the pot for the bank, if you have a ratio of 1.3 or above and the bank says no to an 75% LTV ratio, go to another bank.

JD Martin · Answer

You should be able to refinance 75% of the appraised value. So, assuming you didn't get out of college in December, and that you've had some appreciation, you can probably end up neutral with a lower payment. If it appreciated to $100k (I don't know when you bought it), you'd end up with a $75k mortgage, which about covers your closing costs and the current loan with a lower payment. Whether or not the property makes sense as a rental is a whole other matter.

Luke H. · Answer

If this one is making positive cash flow and continues so long term, buy another 1. Why? well, because as soon as you buy another 1 you will have equity that will continue to grow and you can leverage later (say you need to sale quickly you will make a profit). The key is to make sure you have a balance and always positive cash flow. Plus, you can refinance later.Once you get another one making positive cash flow, pay them down fast while looking for another deal. FOR ME its a balance, use debt to be aggressive, pay it off when you want to relax. Good luck

Mark Fedorov · Answer

At 7%?.. refinance, you should have done that 6 months ago when the rates were mid3's, but you should be able to get a rate in the low 4's... trimming 2,5% off the interest would save you ~1800 in interest in the first yearI am not sure why you think this is do one or the other, you can refinance, you might be able to pull some cash out of the mortgage and use that as a DP for your next house.

Jeremy Mahan · Answer

@Mark Fedorov, When you talk about receiving 130% of the mortgage, do you mean just the payment for the loan, or the total payment, including taxes and insurance, each month? I am currently receiving just a bit more than what I pay each month, which includes the loan, insurance and tax. If I just need 130% of the loan payment itself, then I am probably in good shape. Otherwise, I may be need to either save up and pay it down in order to refinance or just save up and put money down on a new rental.

Mark Fedorov · Answer

Keep in mind the 130% factor is with the NEW mortgage. that 7% is high, with a lower interest rate, your payments become lower and you will see some cash every month.

Jeremy Mahan · Answer

@Mark Fedorov, The rent is currently only covering the mortgage. I could probably get more out of it, but I have a great tenant that has been there for a few years with no issues. I am reluctant to raise rent to a point where she would look elsewhere. I will keep the 1.3 benchmark in mind and try and get it to that point down the road. I appreciate the advice.@Luke H. and @Jd Martin, You guys have given me some things to think about. I am trying to get on the right track with real estate investing and your advice is greatly appreciated!