To Cash out refinance rental SFR to reduce duplex payment or not?

Question

I currently own a 2-bedroom townhouse in Clifton Heights, Delaware county pa. I have no mortgage on it. I also own a duplex in philadelphia that I bought in November 2020, current balance $296,500 that I live in with a monthly total payment of $1856 including tax and all. Interest rate on duplex is 3.0% FHA. I put down 5% when I got it I live in the 2nd floor 3-bedroom unit of the duplex. And the first floor 2-bedroom unit is rented out at $1,000 a month. If I moved out,the 3-bedroom I am in would rent for about$1200. I want to lower my monthly payment on the duplex. So I wanted to pull cash out of the townhouse to refinance the duplex to lower the monthly payment.

I spoke to a lender and was told I would have to do a comment mortgage on the townhouse at 15yrs at 4.4% with a monthly payment of a little over $800.

and after refinance, my duplex rate would be about $1500. Tax on the duplex is about$3000.

If you were in my shoes, would you do it,or what do you think I should be doing? Any ideas or suggestions on a better lender or what to do would be appreciated!

I spoke to a lender and was told I would have to do a comment mortgage on the townhouse at 15yrs at 4.4% with a monthly payment of a little over $800.

and after refinance, my duplex rate would be about $1500. Tax on the duplex is about$3000.

If you were in my shoes, would you do it,or what do you think I should be doing? Any ideas or suggestions on a better lender or what to do would be appreciated!

David Lorenz · Answer

@Afia Amponsah I would say it all depends what your end goal is. Personally I would not refi the duplex. Your going to be hard-pressed to find a much better rate than what you’re already paying at 3%. Yes, it would be nice to have a lower payment, but you also have very little money in the deal with only having a 5% down (Im assuming it wasn’t a major rehab considering you went FHA). I would leave it alone, and consider either getting a heloc on your townhouse that’s already paid off or doing a cash out refi on it to pull money out to buy the next one (assuming you want to scale).

Rich O'Neill · Answer

Similar to what these smart gentlemen have mentioned above, it is basically a financial equation. What you are proposing is basically shifting debt from one asset to another, which will likely have a net total effect of costing you more money given the low rate on the duplex and the upfront costs of refinancing both properties. If the duplex is not cash flowing then that is a completely different issue and you should not try to prop up the numbers by shifting debt. That's just a mind game that you will lose.

Like @Eric Greenberg said, if you are trying to put the equity in the townhouse to work, you basically have to make sure that whatever investment you put it in is earning a better return than the interest rate you are paying on the debt (factoring in the closing costs on the loan- DON'T IGNORE THIS) plus a reasonable margin. Say that is roughly 4% and you want to make at least a 2% margin on top of the interest (factoring in risk), can you make more than 6% in an ETF? Can you invest that in another property that will make more than 6% CoC return? Can you invest it in a syndication and earn the same (check into other qualifications here)?

This is the finance world's version of "Highest and Best Use". The goal is to maximize risk adjusted return on current assets. Since everyone's risk tolerance is different, there is no one way to calculate this simply, but think of the overall concept.

People get 4 and 5 year degrees in this stuff, so don't worry if it is confusing. Hopefully this helps you figure out what the "highest and best use" of your capital is. Let me know if I can help with this any more!

Eric Greenberg · Answer

I agree, it matters what your goals are but Id think you could refi your townhome and make better margins investing in another property or in an ETF.

To Cash out refinance rental SFR to reduce duplex payment or not?

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