Should I refinance a 15 year to a 30 yr to gain cash flow wAirbnb

Question

I currently have a 15 year mortgage on a rental home I bought 8/1/16.  My rate was 3.25% I have a renter in the home and I just break even every month.  When I bought the home I was not interested in cash flow, just pay it off and later reap the benefits.

I would like to refinance the home into a 30yr so I can get cash flow and the rates are looking higher now 4%-4.5%

The renters lease is up June 1st.  At that time I would like to use the property as a vacation, short term rental.  I will put the place on several websites and Airbnb/VRBO.  I have another property I have been successful with for 3+years for vacation/short term rental.  I have 300+ reviews on Airbnb for the other property.

If I get a 30 year mtg. I am looking at cash flow of $1,500/mo after all expenses are paid that would be average monthly.  Some months will be less and some months will be more but the average would be $1,500.  Please remember I have 3 years of experience managing another short term vacation rental.

I would appreciate any advice on what to do financially.  I just don't know if it makes sense.

Thanks in advance --- Denise

Andrew Postell · Answer

@Denise Fitzgerald most investors choose 30 year fixed rates if they are using the "buy-and-hold" strategy (essentially renting).  There are 2 main reasons for this:

• It allows the investor to cash flow more profits to use on things right now. - so if they wanted to reinvest the profits into another property or use that money for another purpose.  There is an important economical phrase called "time value of cash" which essentially states that $1 is worth more now than $1 will be worth in 10 years.  This is because of inflation.  So if you have an opportunity to receive funds now, and spend them on other income producing funds, then this is a superior method to paying down debt in order to receive funds 10 years from now.  Hope this makes sense.
• It allows the investor to qualify easier for future loans.  - So if you need to get another loan having a LOWER payment held against you will help you qualify easier.  Admittedly, one 15 year loan may not disqualify you from another loan, but having multiple 15 year loans could...or one 15 year payment with other high payments might.  So why risk it?  Just keep the lower payment...and your loan won't have a prepayment penalty so pay extra if you want to.  But the debt payment that is held against you is the MANDATORY payment.  And a 30 year payment will be a lower payment.

Hope these help in some way.  Thanks!

Stephanie P. · Answer

@Denise Fitzgerald

It's a shame to throw away a 3.25% interest rate, but if the cash flow makes sense, do it sooner rather than later before the rates go up further.  Rates are on the rise unfortunately and I am betting the 4.5% you were looking at two months ago is now 5.5% on a 30 year.

Denise Fitzgerald · Answer

@John D.      Thank you for your advice appreciated.  I ran the numbers and if I don't refinance my cash flow will average $1,000/mo and if I refinance will average $1,500/mo (for short term/vacation rental).

Right now the property is just being leased/one year --- I have no cash flow.  I can make cash flow I just need to wait for the renters lease to be up June 1.  I have about half of the furniture needed to furnish and decorate for short-term rental (VRBO, Airbnb, Vicasa).  So I will have to invest about $1,500-$2,000 to finish furnishing the entire place.  It is brand new and in a highly desirable area in my city.  3 Master Bedrooms/3.5 baths 1900 square feet.  My cash flow numbers are not solid they are based on the market and my research. My husband an I ran the numbers and it just does not make sense to refinance the property.  I do appreciate people on here giving me advice.  The low interest rate I cannot give up especially since rates have risen quite a bit since then.

The place will be my second short term rental property.  I will make it work and be profitable (cash flow).

Then on to look at other deals.............

John D. · Answer

It seems a shame to toss that locked in 3.25% interest rate away, I would explore a second mortgage, or line of credit, and leave the primary alone.

Thomas S. · Answer

It makes no financial scenes to pay off/down the mortgage on a rental income property. It is therefor beneficial to have a 30 year as opposed to a 15 year mortgage.

Equity in a rental is artificially buying cash flow at a very high rate based on the opportunity value of cash.

Harjeet Bhatti · Answer

30 year fix would be good option,If you are looking for positive cash flow.  Have you run your figures with 15 year fix doing Airbnb?  This is huge difference between 30 & 15 year fix savings. You have good interest rate in 15 year fix.

Should I refinance a 15 year to a 30 yr to gain cash flow wAirbnb

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