Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 27 votes
I'm wanting to re-fi about 8 SFH rentals to take advantage of lower rates. Have owned them for varying amounts of times. Some just a couple/few years and others much longer. Trying to determine if I should just 30 yr terms on all of them to maximize cash flow? Hate rewinding the clock but thinking I should. Or no?
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
5y
Joseph,
I would advise taking all (8) using a 30 Year mortgage for a few reasons. Your going to reduce your overall DTI especially on paper for the banks/lenders. You also have the luxury of paying more when you want to but are not obligated to pay more with a 30 year. You can always pay more or larger lump sums here and there but still have the luxury of a more manageable debt obligation each month. I tell my customers why force yourself to pay a 15 or 20 year payment when you can select a 30 year for the comfort and pay more when its convenient.
You also have to cover yourself for the "What if factor" meaning stuff happen all the time. COVID for example that put a damper on some people right... So would you rather be holding a 15 year note or a 30 year note on your rentals during this crisis?
The other thing is take a 30 Year but make the 20, 15, 10 year payment again when you can but if the ship hits the wall your only obligated to pay the 30 year!
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
5y
Joseph,
I would advise taking all (8) using a 30 Year mortgage for a few reasons. Your going to reduce your overall DTI especially on paper for the banks/lenders. You also have the luxury of paying more when you want to but are not obligated to pay more with a 30 year. You can always pay more or larger lump sums here and there but still have the luxury of a more manageable debt obligation each month. I tell my customers why force yourself to pay a 15 or 20 year payment when you can select a 30 year for the comfort and pay more when its convenient.
You also have to cover yourself for the "What if factor" meaning stuff happen all the time. COVID for example that put a damper on some people right... So would you rather be holding a 15 year note or a 30 year note on your rentals during this crisis?
The other thing is take a 30 Year but make the 20, 15, 10 year payment again when you can but if the ship hits the wall your only obligated to pay the 30 year!
I'll go against the grain, depending how much time you have left on the ones that you've owned the longest. If one is close to being paid off, personally I'd ride that one out if you don't need the extra cash flow now....If it's going to go up significantly when it's paid off and you want to have it paid off. And I mean a few years left not 15 plus years. If they aren't close to being paid off then might as well take the lower rates to boost the income.
Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 27 votes
5y
@Bill Ward - Thanks and I agree with you and had identified all the newer ones as definate 30’s but maybe shortening the term on some of them that I have owned longer. However, none of them are at or below 15 years. So, it’s helpful to hear your opinion on this.
Kansas City, KS · Member since 2018 · 67 posts · 70 votes
5y
@Joseph Agins
If your wanting more properties. Yes, cashout. Make sure you look at the tax laws for the interest expense, if the cashout does not go back into improving that property.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
5y
Only do the cash out part if you have a use for the money. Interest rates are really low to borrow, but they are 2-300 times higher than you’ll get in savings. So do the cash out if you’re going to buy another property with the cash or pay off higher interest debt. Otherwise just to a “rate and term” refi.
@Joseph Agins So I refinanced my home to a 15 when I was living it, then turned it into a rental the following year. I'm now in year 4 of the 15. I have debated refinancing to a 30 yr to increase the cash flow where it basically just breaks even now. Most people on here would say yes refinance to a 30 yr to maximize cash flow, use the cash to buy other properties etc.....here's why I'm not and it's fairly specific to my situation:
I don't need the cash flow, I'm content with it breaking even for now.
I want it paid off to maximize cash flow in 10 years when I'm eligible to retire.
I don't plan to purchase any other rentals.
If I had extra cash flow from refinancing now I don't have any other investments to put it back into, so it would sit in my savings making nothing.
If something does pop up in the future I still have the chance to cash out refinance the property and the longer I wait the more I can take out when I need it.
Rather than refinance all 8, and rather than cash out all 8 without a purpose for the new funds, see if you can pay off one or more of the houses with the proceeds of cash-out refi’ing one or more of the other houses.
E.g. if you had four mortgages of $150k each against homes worth $275k each, you could refi 3 at $200k each ($50k x 3 cash out) and use the $150k in new cash to pay off the fourth house. You have to do it with your own numbers and don’t forget closing costs.
If you can pay off one or more of the houses, there are many good things you can do next:
1) you could get a first-position HELOC a on it and use it to make quick cash purchases, or fund renovations, or anything else you need liquidity for. A local bank might do this through their commercial lending department. Talk to a few of them about terms.
2) cash out the paid-off property when you find your next deal(s), using the equity of the paid-off house as the down payment on the new property. Work in advance with a good lender who will do this for/with you. You need to be very organized to pull off multiple mortgages at once, but it’s very doable.
In both cases, you won’t pay a dime on interest until you are putting the cash into another investment.
In the interim, collect the additional cash flow and use it to top off your reserves.
This is the stage where investing gets really fun. Good luck!
Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 27 votes
5y
@Dan Schwartz - Very interesting and thanks for this strategic response I had not considered. My only question is about the tax/write-off opportunities I would potentially lose on the paid off rental. I always assumed it was good to keep loans on them for this reason. I assume your strategy takes this into consideration but that the benefits of the readily available cash outweigh the potential write-offs? And, if I were to HELOC the paid off home, I would realize similar benefits anyway? Thanks again Dan!
Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 27 votes
5y
@Joe S. - If I were to do any sort of cash out, my goal would always be to buy more property. However, whenever one is sitting on a pile of available cash, it can, unfortunately, be easy to tap into for other reasons.
Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes
5y
@Joseph Agins doing this also adds some complications to wrap Your head around.
You still maintain all of the depreciation you were already getting: building, fixtures, etc. Nothing changes there.
You still deduct all of the expenses you were previously deducting: insurance, cleaning, maintenance, etc.
For tax purposes, you have to do “interest tracing.” So while there is no longer a mortgage on property #4 in my example above, there is still interest being deducted against it. 25% of the interest paid on each of mortgages 1-3 above has to assigned - for tax purposes only - to house #4.
So despite being “free and clear,” house #4 still deducts mortgage interest. Your Schedule E will look very similar to what it would have looked like if you hadn’t refi’d (if you lowered your interest rate, then the amount of interest on the $150k in my example’s principal will be lower).
A benefit you do lose is some protection from liability exposure. Should something happen that causes you to be sued, the larger amount of equity is there for litigants to pursue, vs the smaller amount of equity you have in the property when it is financed. If all of the properties are in your own name or in one entity, then your gross exposure hasn’t changed across all of your properties. If the paid-off property is segregated in its own entity, then the gross exposure increases significantly. If/when you put a new lien on that property, the exposure goes down again.
This is just one of many paths investors can choose. In a time where many have highly-appreciated properties and interest rates are so low, it’s a valuable process to at least contemplate.
Investor · Hampstead NC · Member since 2019 · 39 posts · 46 votes
5y
@Joseph Agins
The YoY inflation rate for July CPI figures was 5.4%. The fed tells us this is transitory but the supply chain disruptions and reluctance of people going back to work probably means elevated inflation (over 3% annually) likely stays with us for another year or two.
Higher fixed-rate leverage on your properties with this type of inflation gives you higher returns in the long run, assuming the values of your properties rise with inflation and you're cashflow positive. For example:
Property is worth $100k, you take out a mortgage for $75k, and you see 3% inflation over the course of a year. Your property is worth $103k, you owe $75k (forget principle pay down for a minute), and you now have $28k equity. Your nominal equity just grew 12%, but that total value is worth 3% less due to inflation, so your real return is 8.7%. Debt servicing costs were covered by your tenants.
That's an 8.7% growth in equity without any appreciation, principle pay down, cashflow from higher rents, etc. purely because you're leveraged.
Debt is cheap right now. Take out as much as you can, leverage to the gills, and go diversify into securities or cryptocurrency.
I'm wanting to re-fi about 8 SFH rentals to take advantage of lower rates. Have owned them for varying amounts of times. Some just a couple/few years and others much longer. Trying to determine if I should just 30 yr terms on all of them to maximize cash flow? Hate rewinding the clock but thinking I should. Or no?
I'd say it depends on your goals and your positions on your properties.
I'd still stay 20 years or less, but that's just me. The way things are going, if you have any balloons coming due, you want to make sure you have enough equity to be able to refinance without having to come out of pocket.
Also, what's your position(s) on your oldest loans? Can you cash-out refi the more recent ones and pay the older ones off?
Rental Property Investor · Savannah, GA · Member since 2019 · 66 posts · 30 votes
5y
@Joseph Agins
I would not refi all of the proprieties, may be half. The idea is to cash out refi the ones you have or a longer length to finish paying, or the one that had appreciate the most/ more equity and/or higher interest rate. And with the cash out pay off some of the other properties and/or buy a new property.
Think in terms of consolidating a larger debt with less properties as collateral, which would not only increase your cash-flow but also put you in a safer position in case the market swings on a different direction. You can always do a heloc on the property you payed off if you need the money.
Only my 2 cents, this is a great dilema to have. Good luck!
Investor · Monterey Area, CA · Member since 2011 · 150 posts · 81 votes
5y
@Joseph Agins
I’m in a similar position now with my SFRS- I’m sitting on some nice equity and am actively doing cash out refi’s.
The cash I’m borrowing out (tax free) is my way of reaching back into the past and patting my former self on the back for having the stones to buy properties.
Feels stupendous that I have all of my original capital out of a property and I get to keep the asset. The same capital now buys another property that my future self will thank me for :)
Rental Property Investor · Houston, TX · Member since 2015 · 52 posts · 27 votes
5y
@James B. - Thanks for your encouraging post. Good stuff and well done! Are you maxing out the cash you can take out for each or only what you put down to buy each one?
I have 2 that I purchased within the last 4 yrs. I think I will start with these as they are no brainers due to the interest rates alone and will see if I can do cash-outs on them as well.