Cash Out Refinance or leave equity in Co-op?

Question

Hey everyone, I wanted to get some expert/experienced opinions regarding something I’ve been considering.
I currently own (2) co-op units in a building with lax rental rules.
I am living in a 2BR unit, and rent out my first bought 1BR unit. The mortgage has since been paid off completely. The unit cash flowed $350-$400/mo prior to the mortgage payoff- for a point of reference.
With interest rates so low, and property values at a high in my market, I’m wondering if I should put a new mortgage on it and cash out the equity. What are the reasons someone would or wouldn’t want to do this?
One of my reasons for wanting to is that I am investing into fix and flips, with one currently in contract- so I would like to free up more capital for additional projects if a deal were to present itself.

Thanks for the feedback!

John Mucilli · Answer

@Jason Lee

You know what Jason I think I misunderstood what you meant. I think you were referring to my personal finances? I will look into what you brought up, raises a point I didn’t think about - but I’m pretty certain I’d be well in the clear to put a new mortgage on that apartment.

John Mucilli · Answer

@Jason Lee

We do have a limit and I am well within it in the building. When I say lax, I mean they do not give you a hard time about renting- although they stay within their limit which is below 15% of tenancy has to be owner occupied. With that said, the question is what are people’s opinions on the pro/con to leaving the building with no mortgage, vs. placing a new mortgage on it and pulling equity out.

Jason Lee · Answer

NCB will not do a HELOC on an investment property.

First thing I would do, if you haven't already, is find out if your co-op has a max debt-to-income ratio and see if any refi or Heloc (if it's possible) pushes you past the max, or if your numbers have changed since you were last approved or with the purchase of your flips. If they are lax on rentals they might be lax with financials too. If not, it could open up a can of worms.

John Mucilli · Answer

Hey @Morris Cohen,

I purchased for $98k and current comps are around $130-$150k

I think you mis-read, I cash flowed around $400 BEFORE mortgage payoff. That's why I wrote it like, that because I assumed someone was going to wonder what the numbers were when I had a mortgage. I really didn't even think a HELOC would be considered at all!

Selling does seem like it would make for a decent payout, but I do like having the cash flow also.

Morris Cohen · Answer

Hi John,

How much is it worth? Given the high cost of RE in NY, I’d expect your return on equity isn’t great if it’s only cash flowing $350 with no mortgage. As such, it may make sense to sell (David Greene has a lot of material on return on equity, so I suggest reading up on that before making a decision). If you can get a greater return on that potential cash it’s definitely worth at least looking into it.

Assuming you decide to keep it, if you plan on doing fix/flips with the cash it may make sense to get a HELOC instead of cashing out. The only bank I know of that would consider an investment co-op HELOC is NCB. That way you only pay interest if you draw on the funds (AKA have an active deal) rather than paying interest on it as soon as you complete the loan; especially if this financing will create negative cash flow.