Is a Cash Out Refi Smart In This Climate?

Question

Hey fellow BPers,

I have 2 properties inside an LLC and have found the refinance part of the BRRR strategy to be the toughest yet. I've taken every precaution to setup my business right and limit my personal liability, but in doing so it seems like I've turned off 95% of the lending world. My best offer right now is 5.125%, 30 year, 75% LTV with a 2% origination fee as well as a $299 app fee, 595 due diligence fee, and add on the cost of appraisal.

Rate my refi if you will. Is this worth doing? I'm estimating I'm going to eat $7,000-8,000 in fees and my cash flow will drop to about $300 per property accounting for maintenance contingency.

Value

$165,000.00

LTV

75.00%

Loan Amount

$123,750.00

Rent

1650

Taxes

1882

Insurance

750

Dues

0

Rate

5.125%

Balance

123750

Loan Payment

$673.80

Total PITIA

$893.14

Residual Income

$756.86

DSCR

1.847

• 30-year fixed, 5 year prepayment penalty  (1% of prepaid balance)
• 75% LTV at  5.125%

Value

$175,000.00

LTV

75.00%

Loan Amount

$131,250.00

Rent

1725

Taxes

2232

Insurance

744

Dues

0

Rate

5.125%

Balance

131250

Loan Payment

$714.64

Total PITIA

$962.64

Residual Income

$762.36

DSCR

1.792

• 30-year fixed, 5 year prepayment penalty (1% of prepaid balance)
• 75% LTV at  5.125% (the same for both scenarios)

Patrick Britton · Answer

@Travis Bagley With a 2% origination charge, a prepayment penalty, and fees on top of more fees, you're obviously dealing with a commercial lender.  For starters, you have my sympathy.

You have the exact same problem I faced about three years ago.  I wish I could go back in time and do things correctly and get on the right track to begin with.

Is there any possibility you could actually quitclaim these properties back into your personal name?  All too often, real estate investors are concerned with a tenant slipping on a banana peel and getting sued to death.  This is why “they” all tell you to buy properties with an LLC but of course these geniuses forget that very few lenders want to lend to an LLC and those who do will make you pay for it!

Please realize that getting sued to death by a tenant is an incredibly rare event in which multiple things all have to go wrong at the same time.  Have a chat with an insurance broker and see if there are some better and less expensive ways of protecting yourself.  specifically, ask about umbrella coverage policies.

There are also some interesting tax benefits, in my humble opinion, from non-LLC ownership.  But you should really speak to a tax expert about those things in detail.

Travis Bagley · Answer

Yes thank you for all the tips everyone. Honestly I never thought money was going to be the issue considering we had enough to get a few properties off the bat. I was all about using an LLC and now I somewhat regret that decision. It certainly impacts my earning/cash flow potential at this size. From what I have read and the feedback above it sounds like LLC = higher rates especially if you are a small time LLC. It is just the cost of doing business as an entity.

I'm pursing one more quote to see if we can at least get into the mid 4's, but everyone is right that if I want to keep growing we are going to have to refi.

Thanks.

Andrew Postell · Answer

@Travis Bagley ok, and some of the above comments are on to something as well.  I am ASSUMING you don't qualify for anything different here.  So if this is your best choice...then what other choice do we have?  If your goal is to continue to purchase income producing assets, then we have to take the money back out to do so.

Now, if you can qualify for a Fannie/Freddie type of loan your terms will be better....but if you cannot qualify then this is the route to go.

Generally speaking there are 2 main types of loans for investors:  “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.  Your income is critical here.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. Here, your income is of no consequence.

Hope all this makes sense.

Salvatore Lentini · Answer

@Travis Bagley - I connect real estate investors with investor friendly lenders and I always tell my investors (like @Jon Kelly said)...it depends on what you plan to do with the money.  Yes, your cash flow will drop...on those 2 properties, but if you intend to buy more cash flowing properties with the money, your global cash flow will grow exponentially from where it is now.

Jon Kelly · Answer

@Travis Bagley what are you going to do with the $255k? If you have the opportunity to invest it and earn more than 5.125% (which you probably do) then you should go for it! If you are going to buy a Lamborghini then I'd keep it in the properties.

Your other option is to sell the properties and take the $340k (before fees and taxes) and purchase larger multi-family.

If you plan to refi, which I think is a sound strategy, I would reach out to a mortgage broker or multiple lenders in your area. You can likely find better than 5.125% out there today.

Travis Bagley · Answer

@Andrew Postell These are owned outright. Thus far the only other deal I have found worth mentioning is a 10 year fixed at 4.85% on a cash out refi.

Andrew Postell · Answer

@Travis Bagley what other choice do you have?  I mean, what type of a loan do you have on these currently?  How much "cash" are you actually receiving from these?  We kind of need to see what to measure it against to see which choice makes more sense.

Is a Cash Out Refi Smart In This Climate?

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