Should I Refinance or not

Question

I currently own a duplex with a family member holding the mortgage.  $75,000 over 10 years at 4.25%.  About 8 years and $60,000 left to payoff.  I was thinking of refinancing with a local bank for $60,000 over 30 years at 5%.  The reason is there is almost no cash flow currently but with a 30 year mortgage I'd have a cash flow of nearly $400 a month.  Am I crazy or does that make sense?  I eventually want to have enough cash flow to replace my regular income.

Jay Helms · Answer

Taxes seem to be high but typically an indication of a good school system = higher rents.  If it were me, I’d move forward on refinancing, increasing to market rents and billing back utilities. You will have great cash flow once those are accomplished.

Also, paying off a property is a strategy. Opens up your liability and leaves equity not working for you. If cash flow is your goal, refinance.

David Ribardo · Answer

@Cory Carrigan, it looks like you have a good little duplex. Phillipsburg 1 bedroom apartments averaged $822 and $1.13 per square foot last month, so your rent amounts seem to be in line with the market.

Your repairs and CAPEX budget seem to be a bit low. Typically I will take the average of 20% of income and 2% of ARV for my planning, but I am a little more on the conservative side. I would find a way to pass on the gas heat, water, and sewer to your tenants. You can do this by keeping bills in your name and charging a flat fee, installing sub-meters and putting them in the tenants name, or by using a ratio billing system (search for "RUBS"). That should get you an extra $100+ per month. Using an income approach, thats an extra $1,200 in NOI per year and $12,000 you just created in property value. (Utilizing a 10% cap rate for phillipsburg)

Back to the refinance question: If your goal is maximizing return, I recommend you do a cash out refinance on the property! You are building up tons of equity, which is money that is making you no additional return. It's the same as leaving money sitting in a checking account. I would wait until you are about ready to pull the trigger on your next deal to refinance as well. That will allow you to pull out potentially thousands of dollars more than if you refinance now and don't buy for six months.

Cory Carrigan · Answer

@Jay Helms What is via RUBS?  The property is in Phillipsburg NJ so the taxes are a little higher than in PA.

@Brian Adzadi Its in Phillipsburg so only 15 minutes from me.  I do manage it myself but I thought the proper way to calculate cash flow is to still count the 10% and have 100-200 cash flow per unit on top of that?

Brian Adzadi · Answer

How far is the property from you? If it' less than 30 min, then u can stop paying a PM and do it urself. Also, try hard to find some way to shift gas heat and water to your tenants. Either by quarterly bills or some other means. With just those 3 things cut out, you just saved yourself $274. Instant cash flow. Lol.

Cory Carrigan · Answer

@Brian Adzadi Account Closed  How do the expenses look?  Am I calculating everything correctly?

Account Closed · Answer

10% PM fee might be high depends on services provided. Sounds like a nice little rental.

A lot of people are hung up on cash flow and might need to be if their highly leveraged. ROI is more important for me, and your property is looking great on it.

Account Closed · Answer

If you need the cash flow than all other logic goes out the window. If its going to cost you $1500- $3000 in fees to REFI at a higher rate, and you don't need the cash than the decision becomes much more questionable.

Ola Dantis · Answer

@Cory Carrigan This is always a tough decision: should I pay down my debt or refinance?

Typically, I'd suggest you go with the refinance because the idea of waiting for a time in the future to get cash flow is too risky in my opinion. Yes, you will get that "higher" cash flow in 8 years when you pay off that mortgage from your family member, but who knows what's going to happen in 8 years.

To conclude, if the idea of investing is to replace your regular income with cash flow from your real estate investments, then getting a regular cash flow will definitely help you.

Hope this helps. Goodluck. Thanks! - Ola

Peter S. · Answer

The property is a cash flow monster if you refinance. Plain and simple. 100k value refi to 75 percent ltv puts 15k in your pocket. Then you are looking at a cap rate of between 9.5 and 11.5. Then 18% cash over cash and 22% roi.

If you eliminate PM, you have a cap rate of 11, cash over cash of 25% and 29% roi. 580 cash flow.

Its a no brainer.

Brian Adzadi · Answer

Cash flow is based off of what you are actually paying for expenses. Not some imaginative figures. So if you are not paying a PM company, don't put it. Unless you are paying yourself as a property manager. NJ is a horrible place to invest in real estate; property tax is too high to make profit.

Should I Refinance or not

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