Refinance or Not?

Question

Hi All,

I have a rental I bought in 2022 here in Maryland for $220k at 4.25% interest and rehabbed it going about $125k in debt for rehab. The value of the house is now $550k.  I moved all that debt to my primary residence home HELOC currently at 8.5% interest.  The cashflow of the rent is $2000 which is very good.  I originally was going to refinance immediately after finishing rehabbing, but the rates had gone up to around 5.5% which at that point in 2022 we thought was too high and it was tough to give up such a nice cashflow.  Now, 3 years later, i have not been able to pay off the primary residence heloc which has stayed at its $125k balance (im 36 and married with 3 little kids in daycare so daycare costs have taken over).

I'm trying tro figure out if its worth cash out refinancing and paying off the $125k HELOC balance at the current 7% interest rates? Or should I just not refinance and keep the nice $2000 cashflow and work on budgeting to pay off the heloc from personal income over the next few years?  Any advice here is appreciated.

Nathan Gesner · Answer

I don't think you are being honest with the math.

The most expensive county in Maryland has an average rent of $2,300 for a 3-bed home. Let's assume yours is really nice and rents for $4,000.

You have an original loan of $220 plus a $125 rehab for a total loan of $345. You moved that all to your HELOC at 8.5% interest, so your payment is around $2,600. That only leaves you $1,400 and doesn't account for taxes, insurance, maintenance, vacancy, or any other expenses.

If you kept your original loan of $220 at 4.25% interest, your monthly payment would be $1100, and the $125 rehab at 8.5% would be $961 for a total of $2,060 per month. Again, even if you rented for $4,000 a month, you wouldn't have $2,000 left over after paying the mortgage, taxes, insurance, maintenance, etc.

So you aren't accounting for all your expenses, and you aren't paying off your debt. By your own admission, you are just paying interest on the $125k rehab loan. That's like not paying your $200 electric bill this month and claiming you saved $200. The truth is, the money is still owed, nothing was saved or earned, and you are just throwing money away on interest.

Here's a guide that describes what good cash flow looks like and how to analyze a property.https://www.biggerpockets.com/blog/rental-property-cash-flow...

Drew Sygit · Answer

Refi if you can get a rate that leads to a payment around what you have now on the HELOC.

If you plan to hold the rental for 5+ years, you can even buy points to get a lower rate.

Jamal Molin · Answer

OK.  Is there a reason why you think refinancing is better?  Do you think it's better to refinance and sacrifice the cash flow in the rental to free up funding for more investing?

Jamal Molin · Answer

This is very helpful and great insight. You're right I should have done better math here.  So, the rent is $3400/month. Mortgage payment including insurance and taxes is $1450.  Youre right the HELOC payment can be seen as an additional $961 loan repayment.  Maintenance maybe $250/month (around 7%).  Property management is additional $250/month.  The tenant pays electric, gas, and water. So that leaves us at $3400-1450-960-250-250 = $490 profit per month.  However, there the 250 for maintenance is an overestimate because I rarely have any maintenance fees (yet at least).

The question I have is if its worth refinancing to get the money out the personal home HELOC?  This would free up the HELOC to use for additional rental property investments.  But the downside if I refinance is that it will make the lower profit for this rental fixed for 30 years.  The other option I keep thinking about is if its worth paying down the HELOC over a 3-5 years and be patient and then eventually I could use the HELOC in a few years to buy another investment. And then keep the bigger profit in this first rental long term.  Or should I take the risk and trust that if I refinance now, accept the lower cash flow long term for this rental, and then use the freed up HELOC to get another investment sooner (maybe this year).  Im new to real estate investing but i am 36 and want to invest a lot more going forward.  I just dont know what the best investment move here is.  Be patient and wait it out paying off the HELOC slowly, or refinance and free it up right away.  Any advice?