Should I refinance this property at today's high rates or let my cash sit?

Question

In early 2022 I had intentions on using $250,000 of my cash to purchase 4-5 rental properties, and finance them all at the lower rates at that time.  Unfortunately, I delayed my first purchase until Fall of 2022.  Rates had jumped significantly at that point so I decided to buy one property all cash, rent it out and hold until rates became a little more reasonable.  I was able to buy that property at a discount for $212,000 and do some minor updates - all in for about $220,000, renting it at $2,000/month. The property is now worth $285,000.  After taxes, insurance, and HOA dues, I cash flow $1,100/month.

In the previous world of 3% rates (if I hadn't bought 4 -5 properties at once) I would have quickly financed that new $285,000 value with 20% down, allowing me to pull out all of my original cash investment and do it again all over again. But in today's world, to comfortably cash flow $200 - $250 on this property, I would only be able to pull out about $150,000 and reinvest it into another.  My current cash flow of $1,100 is a nice bit of passive income that I really hate to disrupt, but I know the power of owning more doors.

So, should I sit and hold this one property with no mortgage on it until rates decrease a little, or bite the bullet, refi that property now and re-invest into one more property.  With my amateur calculations it appears that my cash flow decreases significantly when I pull out that money and buy even just one more rental. I know two properties increasing in equity from appreciation will move faster than just one over time, but today's rates and my current cash flow are making me want to stall.  Any advice?

Ryan Hicks · Answer

Thanks, Isaiah!  I'm 53, so house hacking isn't really an option.  However, I am encouraging my two 23 and 25 year old sons to house hack.  I actually had an 8 unit apartment building under contract with owner financing a little over a year ago, but found a major potential hiccup with an easement across the front of the property that would be too much of a risk as the neighborhood around it develops (regentrifies), so I ended up pulling out.  I had planned on using that $250,000 as a down payment on those apartments about the time I was also considering 4 - 5 single family properties.  So, yeah...the more doors the merrier.

Ryan Hicks · Answer

Thanks, Sean!  I agree that while the cash flow appears attractive off of this one property, I could increase the ROI and cash on cash return with another property, even if the initial monthly cash flow appears lower.

On another note, I recently found a free online calculator at calculator.net/rental-property-calculator.html .  It seems like a relatively solid yet simple calculator.  If you have a rental property calculator you'd recommend, please share.

To follow up to part of your response and part of a response from Andrew, many "expert" economists are predicting rates to drop as much as 2 - 2.5% in 2024.  While that intially appears to be incentive to wait to buy until those rates do drop, to Andrew's point, prices will be higher then and competition much more fierce as a result.  Ideally, NOW is the time to buy at relatively lower values, keep just enough cash flow to have a small buffer, then refi when rates do decrease. At that point, at least I already have the asset in hand.

Ryan Hicks · Answer

Thank you, Andrew.  I agree with not worrying too much about timing the market over the long term, but it's tough when you know the significance of buying low and selling high.  Although, considering that I'm not really selling, but just buying a higher rate, I can probably stomach it over the short term for one property, then refi when rates drop.  The goal is the BRRRR method and to hold each property long term, or 1031 where desired, to ideally never sell, and to ultimately pass along my future portfolio to my kids.

Andrew Postell · Answer

@Ryan Hicks there's two sides to what you are asking...if you wait until rates are lower, then home prices will be higher.  If you pull out your cash now, the rate will be higher but everyone is getting a good deal on their purchases right now.

Keep in mind that if the year was 1973 and you wanted to "wait" until rates were lower you would be waiting 20 years.  If you pull out "only $150,000"...that's a HUGE amount of capital.  I mean, it's all about your perspective but if I can be directly about one thing - you've already admitted you couldn't "time the market" before...so let's not try to "time the market" again either.  Even Warren Buffet states he doesn't know how to "time the market", he just buys good "values".  That sounds like a pretty good way to look at it.

Hope all of that makes sense.

Sean Hudgins · Answer

@Ryan Hicks, There is nothing wrong with where you are at, but I think the more important question is, where do you want to go? You are 53, so your outlook and investment goals may not align with those of a 20-30 year old. You could probably optimize your holdings a little based on your situation.

You are currently making 4.6% ROI on your equity and 6% on your invested cash. I don't think I would keep all my cash in there. The question to ask is how much money you need to purchase another property and increase your ROI on your money.

If you purchased similar properties, you would need around 50-60k each to acquire and maybe do some light rehab. So, if you pulled all your money out and were still cash-flowing, you could acquire three more properties. But that's also the approach that I, as a 31-year-old, would take; you may want some more security, or the cash flow may be a little more important to you.

So what if you just pulled out 60k and bought one more property? That would keep your current cash flow healthy and give you another appreciating asset.

Isaiah Lopez-Torres · Answer

Okay so yeah that does change things. I would still wait until rates drop more because they have been falling for a few months. Better to have a decent rate, cash flow some and pull out the equity to reinvest. But ultimately its up to how comfortable you are with risk. Also have you looked into a self directed IRA? Since you are close to the age of 59.5. I would also suggest talking to a financial planner about this option.

Isaiah Lopez-Torres · Answer

I'm still relatively new to real estate but I would just save the money that you are making from the cash flow and reinvest that for now. I would wait to see if rates drop atleast 2 to 3 percent to refi to take your cash out just my advice. I would also suggest avoiding a HOA in the future.

Have you also looked into multi family investing and house hacking to lower downpayment and lower rates due to owner occupied.

it basically also boils down to how fast you want to scale and how you want to structure your portfolio.

Good luck your already off to a great start with a paid off property and strong cash flow!

Should I refinance this property at today's high rates or let my cash sit?

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