LTV High or Low best in refinance?

Question

Recently I've wondered why I felt low LTV was better as an investor for long term survival. You don't want to be upside down or over leveraged if/when the markets change. But, that would seem to only apply if / or when you sell, or if the rental market tanks and revenues drop significantly.

So, if I have a sufficient cash flow and DSCR at or near 2 after refinance and cash out bringing my LTV to say 85% or 90%, and use the cash out to have greater capital reserves, and to re-invest in properties for additional cash flow, then why would this would be a bad thing?

I mean, if markets tank and the values of my properties have sunk, that doe not necessarily mean my rental revenues have tanked too, or at the same %. So if I still remain cash positive after mortgages paid I am not in danger of default, and if additional properties are bought with the additional cash out - say from 75%LTV to 85% LTV, then I've built additional security against default. It would seem that if rental rates plummet, and now my cash flow is negative, but I have greater cash reserves to survive such a blow, survival would be limited until either I run out of capital, or rental revenues improve.

Could there be a clause in a mortgage which states if the value of the property drops below the value of what it is mortgaged at the lender can take possession, or call the note, or change interest rates?

Looking forward to hearing from some of the pro's out there!

Greg Scott · Answer

The key to your question is cash flow.If you are in an expensive market, you might have negative cash flow at 75% LTV. I'm not a fan of that, but many on this site are. Of course, you subject yourself to a lot of risk when running negative cash flow. If you have one hiccup (lose your job, major issue at another property, medical issue) the whole thing can come tumbling down like a house of cards. Conservative investors in expensive markets may want low LTV so the property cashflows. Unfortunately, low LTV usually translates to low ROI.I like investing in markets where you can find cashflow at max LTV. My ideal scenario is positive cashflow at 100% LTV! That is an easy infinite return.

Greg Gaskill · Answer

@Kevin Romines Yes sir, you are making an important point about HELOC, in that you only pay on what you use. My concern with cashing out a ton, is the cash sits there until used while I'm paying on it. Currently, our portfolio of 10 properties/26 units averages 36% LTV (1 at 24% LTV skewing the rest), which is a result of not BRRRR'ing them - long story, but I really want to get that cash out to re-invest. I've explored a portfolio loan with cash out, but unfortunately due to the massive amount of cap-ex and repairs working with Rental Certification through the city, we're just now entering positive territory with cash flow. Pro-forma numbers look great, however lenders are wanting more history which isn't there yet. Perhaps individual HELOC's per property would allow those who have stabilized to receive a line, those who need more time can come later? If either you, or @Greg Scott have any suggestions I'm all ears!Thanks a ton for your input.

Greg Gaskill · Answer

@Greg Scott - Oh, it is sooooo nice to hear your words as they are what I was trying to rationalize. You hit on all the things I was starting to feel, but recognizing I have been wrong before kept me from acting on this. Thanks a ton for your input!

Kevin Romines · Answer

To answer your last question first, no there is no clause that gives a lender any power to claim/foreclose on the property just because the value dropped. You are correct in your thinking in that if you are cash flowing at higher LTV's at the 2% rule or anywhere above 1.15% you should be fine. The cash out does allow you additional reserves or to invest in additional properties, hedging the bet a bit against a single rental not paying and causing cash flow issues. I would go forward with as high a debt ratio as you can get on the cash out refinance to use additional funds to buy more and pad your reserves.You might consider a HELOC on the rental to 80% which is the highest LTV you would get on a cash out anyway. By doing the HELOC, you have the capacity to cut a check at any time, but not the additional expense and risk until it is time to write the check. Once the HELOC is approved, you can use it when you want. If the market implodes somewhat like 2008 they will shut off your ability to draw on the HELOC and you will just go into full repayment mode. They can't foreclose unless you are behind on payments, so the risk is minimized in that aspect. Pen Fed Credit Union will do a HELOC up to 80% on a rental. I hope this helps.