Would you refinance for 33K cash?

Question

We are looking at refi'ing a property while rates are low again, mainly to get some cash for creating more units on an existing property and/or new purchases. We've bought one property a year for the past three years, and currently have a SFH and two duplexes.

Property details: SFH, appraised at 230k and refi'd last year, did not pull max equity out (novice move, we know). Currently has a 133.9k mortgage at 3.75%. Mortage at about $660/mo plus about $200/mo escrow for $860 total.

New refi would be at 4.375%, 70% LTV (max this company offers). Based on last year's appraisal of 230k that would mean pulling out 172.5k - 133.9k = $38,600 - $5000 closing costs = about $33k cash.

Total monthly payments would go up $200, from $860 to 1070. Rent is 1300.

The cash would be used to add another unit to a duplex or to purchase another property.

Is this worth it? Any thoughts? Thanks.

Allan C. · Answer

@Tandi H. Through simplification, you are going to net $900/yr ($3300-$2400) if you achieve a 10% return on your $33k, which is a 3% net return. If you achieve a 20% return on your $33k investment your net return is 12%. After adjusting for risk, your upside is mediocre and your downside is unattractive.

Tom S. · Answer

@Tandi H. You can't just do a HELOC so you don't have to ref the 1st? Plus HELOC's usually have fairly low closing costs.

Shaun Weekes · Answer

What are you looking to do with the 33K?

Shaun Weekes · Answer

Since the money is being used for a long term rental I would just do a cash out refinacne. Rates will be lower than a HELOC and over time it will be more cost effective. If this were a fix and flip or BRRRR less than 6 to 12 months a HELOC would be your best option. Just my 2 cents.Take care and have a great day.

Tandi H. · Answer

@Allan C.. Ok thanks for the confirmation. Yes, I do then have the added carrying cost of the 33k...and another factor which makes it even more complicated is that after adding the new third unit to the second property, I would plan to refi that property which would now have a much higher value. Then I would have the benefit of the cash out from that second property refi and also the carrying cost of the new higher mortgage and a higher monthly payment on that property to consider. But I think this second refi would result in pulling out about 80-90k, which could then be put into a new purchase...allowing me to keep growing my portfolio. In terms of the construction cost, the 33k should cover all of it including architect and permitting fees. The space is a fully enclosed and insulated garage now, so we would be building out the interior, and adding windows and doors and new stucco to the exterior. It's about 700 sq ft.

Allan C. · Answer

@Tandi H. I’m simple terms, your analysis is correct. If you wanted to assess with greater accuracy, you should deduct the carrying cost of the $33k over the time period it takes to build the new unit (ie, the money isn’t generating income, but costing you ~4% interest). However, it appears that you have fairly healthy returns on the investment, so the carry costs are minimal compared to the upside potential. If you haven’t done so already, certainly spend significant effort understanding the construction cost - that seems to be the largest uncertainty in your situation.

Tandi H. · Answer

@Allan C.. Hi Allan, thanks for your input and the example. I think I would be making more than the 10% return....Let's say I used the 33k to create an additional rental unit on an existing property, which makes 800/mo or 9600/yr, minus 2400/yr in less income from the refi'd property. That would be 7200/yr on 33k, or 22% return, right?

Tandi H. · Answer

@Tom S. I didn't consider a HELOC, but that's something I will look into. I'm generally of the camp that prefers to keep as little equity as possible in properties, to have access to it. That's why I was looking at another refi. @Shaun Weekes We would use it to either:1. Add another unit to one of the duplexes - my husband does all our work, so that project is dependent on him having enough time off his day job. Which means it can take awhile to get done. The unit would be the conversion of a 2-car garage into a one bedroom unit that would rent for about 800/mo.2. Purchase another rental property - it could be the down payment, we are doing a trip to visit a family member who is interested in partnering on rentals in their area. It would be good for us to not be only based in our current hometown.Hope that clarifies the use of the refi cash. Either way in the long run we would be getting more cash flow, though less from the refi'd property.