Any reason to not recast loans?

Question

Some of my rentals loans have about 20 percent of the debt paid off.  Given that we may be going into turbulent economic and times, and I work in an industry going through a downturn I figure now is a good time to improve my rentals balance sheet and improve cash flow a bit. I realize one negative could be the improved profitability will increase my tax exposure but I will probably do some cost seg studies this year to pull some depreciation forward to offset that and then some.  Additionally with the fed tightening and raising rates I have some cash doing nothing that I am not motivated to put into the market so whatever small principal payments the banks would require to do the recasts seems like a decent use of money now vs letting the cash sit idle.  Curious if any others are considering recasting their loans now, and if not, what downsides you see to doing it?

Amir Navabpour · Answer

@Albert Bui exactly. I plan to just make whatever minimum lump sum they ask for. Usually its 5k.  The benefits I see are better cash flow, and overall, over the life of owning these properties I shift some of the interest payments to bank toward bottom line cash flow.  The only downside I see, is on a spreadsheet, usually the more "skin" you put in a property the lower your COC % goes down, but profitability is more important than that.

@Bob E.  I agree, I never understood those who view debt as something to never touch. I understand the tax benefits but I never understood the value of paying 100 in interest, to get 33 dollars back.  Feels like system wide indoctrination to me.

Albert Bui · Answer

its important to note that the recast is only effect based on how many months there are left on the original note relative to the balance you have paid down.

So IE if you had 250k balance with 350 months left (you've only had this loan for 10 months of the full 360 months) and you happened to come into "money," with a chunk of 100,000 then you can pay down your loan with this 100k.

On a fixed payment loan your monthly will not change however the proportion of principal and interest will adjust (principal will go up and interest per month will go down). All a recast does is it takes that remaining 150,000 balance after paydown and stretches it back out to 350 months so his monthly payment will be more bearable, lower, and cashflow as a result will go up. He can always pay extra to pay off the loan quicker when he wants to go but I dont see a downside to it because when times get tougher his monthly debt service will be leaner.

Amir Navabpour · Answer

@Albert Bui  got a big laugh over here with the 800 dollar sandwiches…..

So, what I ended up finding out is on a recast they will only recast for what you put down as an additional payment.  They will NOT count your past monthly principal payments toward a new balance.

Jonathan R McLaughlin · Answer

@Amir Navabpour agreed, debt pay down (tenant driven of course) is one of the strongest pillars supporting real estate returns

Bob E. · Answer

@Amir Navabpour  Sounds reasonable to me.  Debt is way over ranked, i get that most of us need debt to build our portfolio but part of the goal show be to pay it off.  Are you in a position to just pay off one or more properties?  I would focus any recast money on the smallest balance loan as that will make it easier to pay off the property later.

Erik Browning · Answer

Hard to say without looking at your full financial profile, including how well diversified you are into other assets (if any). I suppose yes, if you just have large piles of money lying around (nice problem to have) and you are spread evenly across other asset classes.

I'd say no, don't recast if either 1 - you are not diversified or 2 - you don't plan on diversifying but want to keep buying more properties.

Again, it really depends on your end goal. I recommending outlining that and working backwards to achieve it - you will find your best use of capital after that analysis.

The argument against using that capital into your assets is that you use it elsewhere that would be more useful that would produce higher returns, not lock up your $ into an illiquid position, and offset your tax basis. You know what this sounds like? It sounds like you should open up your own business. Use the capital to get it running, write off expenses, increase your revenues, diversify your income... you did mention that your industry is in a downturn.

The argument for dumping the cash into your properties and recasting is that you just want to play it safe, which I understand. Widening those profits, though still increasing your tax basis, might make you sleep better at night - which is arguably more valuable.

Best of luck!

Chris Seveney · Answer

@Amir Navabpour

I am not considering it right now, but my situation is very different. Each scenario should be evaluated based on need.

I don’t see a risk in it unless you were to increase the loan balance / then potential for over leverage.

Any reason to not recast loans?

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