Investing and Financing Philosophy

[Tiffany Smith]

Hi!

I purchased my first rental property for $610k (duplex) using an FHA rehab loan. I also obtained a private money loan with an 11% interest rate to fund the rehab in the amount of $65k. The income from the rental property is cash flowing to my satisfaction (~$288/door). It's been about a year since the purchase and I am now ready to invest in my second rental property using refinancing of the first property. I wanted to get thoughts/opinions on whether to pay down the private money loan with cash obtained from refinancing my first property, considering the 11% interest rate? Or just keep moving forward acquiring rental properties considering the rental income from the first property is covering mortgage and the private money loan payments and is still cash flowing.

Thanks!

[Cassidy Burns]

Hey Tiffany,

Congrats on the purchase.  You are going to get a lot of different opinions on this subject, so i'll just give you what I would do:

11% is expensive $$$$ and the market is at a high right now, so I would use the ARV of that property and do a HELOC, pull out the equity, pay off the hard $$ lender, and now you are reducing that particular interest to prime + 1 on most HELOC's.

I would do this over refinancing because i'm guessing since you purchased with an FHA a year ago that your interest rate is anywhere from 3.75-4.25% . If you refinance now you will be getting a 4.5-5.5% interest rate. But then again, maybe you have have monthly PMI and want to get rid of that with your FHA too.

Lots of options, once you know the exact #'s and the appraised value of the property currently you can make a more educated decision! 

Good luck, I hope this was helpful.

[Ray Johnson]

@Tiffany Smith I agree with @Cassidy Burns That 11% is way too expensive, that needs to go immediately. The question I have is what's the current rate on the 1st position debt and what rate would you be getting in a Refi on the 1st position debt? Is there enough equity to wipe out the PMI doing a Refi giving you more cash flow? If so, I would go that route, If not, I would do a HELOC to pay off the 11% debt since your HELOC would be far less than the current 11% 2nd position debt.

[Brandon Ingegneri]

Get out of hard $ as soon as you can. It’s temporary financing.  It is a means to an end, not an end itself. 

[Jerry Padilla]

@Tiffany Smith 

What is the current value of the property? 

You may be able to rate and term refinance the property with conventional financing. For a conventional rate and term refinance on an investment property you will need an LTV of 75%, for a duplex. At this LTV you will also avoid mortgage insurance - giving you a decent savings as well.