Can I do better? (Cash Out Refinance)

[Jay Patel]

Hey guys, 

So I am trying to cash out, refinance one of my rental properties. A little history: I purchased this property back in Feb 2016 for $50,000 with $800 closing costs (All in: $50,800). I have 100% equity in this property with no current mortgage. I have been talking to my small local bank and these are the terms they are offering: 

Loan Amount: $60,000 (I'm assuming they appraised at $80,000 with 75% LTV - this was not stated specifically)

Am: 15 years

Rate: 5% fixed for first 5 years, then 1 yr treasury + 350 points (5% floor) 

Monthly payment: $477 (approximately)

Here are my numbers on the property:

Property Curently Rents for $935 a month:

Monthly Expenses
P&I	477
Property Tax	104
Insurance	52
Vacancy	80
Maintanance	50
Cap-EX	150
HOA	0
Property Management	0
Total:	913
Monthly Cash Flow	22
Yearly Cash Flow	264

This would allow me to pull out more than I put into the property. I don't have any deals lines up per say, but I could begin searching for the next deal with these available funds.

My questions are:

• Can I do better with the terms/rate of the loan?
  • The variable rate after the 5 years scares me a little given the feds will probably be raising rates

Please let me know your thoughts.

[Shaun Weekes]

Originally posted by @Jay Patel:

Hey guys, 

So I am trying to cash out, refinance one of my rental properties. A little history: I purchased this property back in Feb 2016 for $50,000 with $800 closing costs (All in: $50,800). I have 100% equity in this property with no current mortgage. I have been talking to my small local bank and these are the terms they are offering: 

Loan Amount: $60,000 (I'm assuming they appraised at $80,000 with 75% LTV - this was not stated specifically)

Am: 15 years

Rate: 5% fixed for first 5 years, then 1 yr treasury + 350 points (5% floor) 

Monthly payment: $477 (approximately)

Here are my numbers on the property:

Property Curently Rents for $935 a month:

Monthly Expenses
P&I	477
Property Tax	104
Insurance	52
Vacancy	80
Maintanance	50
Cap-EX	150
HOA	0
Property Management	0
Total:	913
Monthly Cash Flow	22
Yearly Cash Flow	264

This would allow me to pull out more than I put into the property. I don't have any deals lines up per say, but I could begin searching for the next deal with these available funds.

My questions are:

• Can I do better with the terms/rate of the loan?
  • The variable rate after the 5 years scares me a little given the feds will probably be raising rates

Please let me know your thoughts.

With a free and clear property you can control the terms much easier. I would do the loan at 60% LTV and this is why. You're not going to get hit with standard LLPA's (Loan Level Pricing Adjustments) which is something that Fannie & Freddie charge on the back end of the rate. You'll still get 98% of your cash back, cash flow better and I would strongly recommend a fixed loan at 30 years. If you want to pay off the loan faster, you can just pay extra every month.

You're in a power position so don't mess with variables rates. At least do a fixed loan and from there it's all gravy in your scenario.