LTV - What's an Extra 10% Worth?

Question

I'm refinancing my primary residence (2-unit, owe $30k), assessed value is $168-180k, that I plan to hold indefinitely. I don't understand how to evaluate the benefits and marginal cost of an additional $30k on hand, and if this is the best option for securing $30k.

Details:

I have an occupied SFR rental (cash purchase just closed, no loan, plan to flip early 2020) and am closing on a 2-unit fixer-upper (cash) at the end of the month, and need the cash out of my primary to fix this up (est. $70-90k) and then plan to do a cash-out refinance. A comparable house sold on the block for $174k in worse condition after the initial assessment, the company won't allow a reassessment, I think $180k is reasonable. No personal debt, 750 FICO. I am evaluating two financing options (cash out value subtracts closing costs and HELOC payoff:

• 75% LTV @ 4.99%, assessment $168k; $828 monthly payment, yields $90k cash out.
• 85% LTV @ 5.25%, assumed assessment of $180k; $1,166 monthly payment with PMI for 10 years, then drops to $1,075, yields $120k cash out.

Goal:

I aim to buy more properties to buy & hold, and am only flipping because a great deal came up. In my market $30k can purchase another fixer-upper. The marginal value of that extra $30k is high. What am I not considering, how do I evaluate this value/cost, are there better ways to have cash on hand? The lower loan of $90k is my estimated reno costs, if they end up higher I do have a 401k I could tap.

Jim Goebel · Answer

@Lauren Schifferle

You're thinking about this the right way.  Evaluating the opportunity cost of not having that extra money out should largely be done while considering the following, in my opinion:

• first, what other options do you have for the capital?  If you don't have other projects lined up then this is going to be best estimated by guessing.  You'll want to look at your estimated returns compared to your cost of capital
• second, the risk adjustment for being 'overly leveraged' needs to be evaluated - essentially your own 'stress test' - last thing you want is to be forced to increase liquidity at a time not at your ideal/choosing.  This is more specific to your overall financial picture...