Lowell, MA · Member since 2017 · 143 posts · 37 votes
I have a 4 unit investment property that cashflows handsomely. I want to refinance and cashout the initial investment capital to redeploy it elsewhere. However if i do this my monthly debt service is going to go up. A friend suggested that I takeout a line of credit instead of a Refinance. This way I won’t have to pay closing cost and my payments remain the same. I would only deploy the line of credit money towards new investment. What’s are your thoughts?
@Khemaro Nuon Sell the asset and move into a larger investment. Plus it resets the depreciation schedule and if you do cost segregation it makes it even better. Right @Yonah Weiss ?
Correct, unless you are doing a 1031 exchange, in which case it does not entirely reset the depreciation.
But it's always a good idea to move on to bigger and better. Another option is to take some of the proceeds from the cash-out refinance (which are not taxable) and invest that in a multifamily syndication, which Dan could probably tell you more about.
@Khemaro Nuon. You will for sure do better using a Heloc. That way you don’t overspend and you can use just what you want. It gives you more flexibility on what you want to do
Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
6y
@Khemaro Nuon Sell the asset and move into a larger investment. Plus it resets the depreciation schedule and if you do cost segregation it makes it even better. Right @Yonah Weiss ?
@Khemaro Nuon Sell the asset and move into a larger investment. Plus it resets the depreciation schedule and if you do cost segregation it makes it even better. Right @Yonah Weiss ?
Correct, unless you are doing a 1031 exchange, in which case it does not entirely reset the depreciation.
But it's always a good idea to move on to bigger and better. Another option is to take some of the proceeds from the cash-out refinance (which are not taxable) and invest that in a multifamily syndication, which Dan could probably tell you more about.
Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
6y
I would look at the refinance and also look at a sale as this is a Great time to sell a good asset. Also if you like being a landlord then 1031 into another larger deal for yourselves
Investor · Lexington, SC · Member since 2018 · 779 posts · 501 votes
6y
@Khemaro Nuon Based on your initial investment or the equity sitting in the deal? What would your cash on cash be if you removed your equity and put it into another income producing asset?
Also consider that a Refi is a new mortgage, and as such will have fees and closing costs associated.
A caution with HELOCs is that the interest rate is often variable, and therefore can change from month-to-month. So you need to know the maximum the monthly interest rate could increase and make sure that your property will still cash flow against the HELOC payments even if they go up. Additionally, with HELOCs, be sure the terms do not require that you hold a minimum balance, which could negate one of the major benefits of a line of credit.
Real Estate Investor · Waldorf, MD · Member since 2014 · 592 posts · 320 votes
6y
Sometimes I read other comments and then either add in favor or take a different approach. In this case, I'm straying away and advise that you keep the asset and continue cash flowing. Use that a creditability chip to prove to other investors that you have a solidified system in place, and then start syndicating deals. That would be my approach.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
6y
@Khemaro N. - with refinance loan you'll be charged interest on the full amount from the day you sign the loan papers, regardless if you use the money right away or wait 6 months to find a good deal. If you pay down the balance, you can't get more back, and if you pay it off completely it closes and you have to repeat the entire operation.
Get a LOC - asset based line of credit or portfolio line of credit. The interest is based on the daily balance, and is charged only if you have balance. You can pay it off, find another deal, reuse them money and repeat.
Philadelphia, PA · Member since 2015 · 177 posts · 64 votes
6y
@Khemaro Nuon
I’ve had this dilemma with a few of my original properties. It comes down to what your midterm goals are and if the current asset fits that criteria, and how good of an investment it is if you were to take the majority of the equity out.
First, you need to look beyond CoC returns. CoC is a good measure when you first are acquiring a property but after some time the cash you invested is a sunk cost and the new measure is Return on Equity. You can be getting 39% return on your initial investment but if you are sitting on 100k in equity, then your cash flow is likely not supporting a great return on that equity. This measure will determine if you should cash out on that equity. Heloc is preferable for quicker transactions as it is not long term debt and the rates can change on you. I use a Heloc on one of my properties to close quickly on deals and then refi to pay it back. I would not use this to down payment on something that might tie up that capital long term. For long term you need to refi.
Philadelphia, PA · Member since 2015 · 177 posts · 64 votes
6y
You should only refi if the new numbers on the property look as good as a new acquisition should, and if the property is in line with your future plans. For example, if you are looking to move into bigger properties then refinancing into a mediocre deal for a smaller property might not make long term sense.
I sold one of my originals for this reason and kept one. The one I kept still has outstanding return because the rents are sky high compared to the price. This is because it’s in the middle of a gentrifying area which is another reason I am holding on. It might appreciate significantly in the next 1-2 years so it’s a good short term hold.
Lowell, MA · Member since 2017 · 143 posts · 37 votes
6y
@Igor Messano and everyone thanks for the input. Ultimately, I want to scale up and get into bigger deals more cashflow. Seems that if i refinance now, I am still going to cashflow 35%. It would make sense for me to recapture that initial money and deploy it into another multifamily property as down payment.
Rental Property Investor · UT · Member since 2014 · 127 posts · 68 votes
6y
@Khemaro Nuon Thank you for posting this thread, I've been in a similar situation and have been asking the same questions. I'm in Utah and am fighting a crazy market, struggling with keeping my unit as a rental (90k equity) or 1039 into a larger one. Would love to 1039, but fear, in our strong market, not finding a deal before the clock runs out. Wish you the best my friend!
Lowell, MA · Member since 2017 · 143 posts · 37 votes
6y
@Dan Gustavson My wife n I also looking to do the same 1031 exchange with another property we have. What we did is find a seller first then negotiated the term with some money upfront as a downpayment. Currently now our property is on the market. Once we get a buyer then we can start the process.
Attorney · Southfield, MI · Member since 2016 · 102 posts · 83 votes
6y
That is awesome @Khemaro N.. If your property is cash-flowing and it fits your current needs, and your future plans then I would say stick with it and take out your equity (Refinance if you want to lock in rates and KNOW your expenses, and HELOC if you want more flexibility and lower upfront costs). Having said that, if this investment does not fit your long term plans, then I suggest 1031'ing into a property that does. If you plan on having MF's and large ones, then a 4 unit may not fit that. 1031 and cost segregation with @Yonah Weiss (on the new basis) is really the best way to build wealth, and keep your money from the IRS legally.