Refinancing two properties to get another one-bad idea?

Question

I am looking for some input on whether or not a deal I am working on is a smart move long term.  My partner and I own 2 SFRs. Rent total for them is 2270 a month.  Purchase price was 100k plus 15k in repairs for one and 128k with 1k in repairs for the second.  They are worth ~270k now and we just bought them a year ago.  We are under contract for a third property at 110k which will require 3k in repairs for it to be rent ready and it will rent for $1100 a month.

The idea that we are throwing around to not come out of pocket for the third property is to take a commercial loan from a local bank with 80% financing at a rate of 4.9% 5 year term/25 year am.  The current financing on the first two is a typical 30 year traditional loan at 80% loan to purchase price and a rate of 4.99%.  The plan with the commercial loan is to finance 80% of the first two properties based on appraised value(270k with 80% being 214k) which would pay the note on their original loans(182k) and leave 32k to use.  We would use that to put down the 22k on the third property which leaves 10k to use on the 3k in repairs.  The extra 7k would either come back to us or immediately pay down the new note.  Some of that would also be used to pay the ~$1500 in closing costs on this new loan.

I understand that this increasing how much we are leveraged greatly(by 34k).  The question is whether or not the benefit of getting the third property without any additional cash out of pocket is worth increasing our debt.  I plan to get our accountant's opinion as well once we get a little further into the deal.

I would appreciate any and all input.  Let me know if I missed some data that would help to give an opinion as well.

Thanks in advance

Bryan Devitt · Answer

IMO as long as they still cash flow with the new numbers, I would leverage everything at 80% and keep the ball rolling until I had the amount of properties I want. You can always pay them off later with the cash flow if you want, but you need the cash flow to do that.

Thomas S. · Answer

"we will be sacrificing some cash flow to get another property."

Since it is your equity in the property that is actually "buying" your cash flow as opposed to being generated by the property you are not sacrificing anything by transferring that equity to another property. By transferring the equity to a 3rd property you will then be buying the same cash flow over there that you gave up on properties 1 and 2. There is zero impact on how much cash flow your equity is buying.

The bottom line, and most important factor, is not how much cash flow your equity buys but how much cash flow the property itself generates without equity. That is the only number that puts money into your pocket. Buying cash flow with equity takes money out of your pocket.

Bryan Devitt · Answer

Will the new property make the cash flow equal out to what it is currently with 2 properties at least? Also remember that your mortgages will stay the same (if you do 30 year fixed) but the rent will increase every year. So even if it is a wash for now, it will make your cashflow grow that much more later. I know others on here will completely disagree with me and there is no right answer, but I am a fan of using leverage as long as it isn't maxed and if instead of the upside being immediate, it is a snowball instead.

Shawn L. · Answer

Easy enough to calculate based on the numbers you gave - Principal balance of $214k, 25-year am at 4.9% is a P&I payment of $1,238.59.  You also mentioned there's a 5-year balloon (at least I think you did, I can't see your post when I'm typing this...)  Principal balance at the end of year 5 would be $189,258 which you would then have to refi, keep in mind you'll incur closing costs again at that time and rates will likely be higher than they are now.

I just did a cash out refi on one of my buildings and am doing a bunch of direct mail to find another one. Definitely a good way to free up capital for additional purchases as long as you don't over-leverage and end up in a situation where you're not cash flowing.

Joe Villeneuve · Answer

Lot's of numbers...but you're missing the most important one's...the cash flow.  After you get these 3 deals in place, with the financing, what is the cash flow on each?  I don't care about the rents.  They mean nothing to me.  I don't care about how much money is coming my way.  I care about how much I keep.

Robert Siverd · Answer

Appreciate the thoughts.  The main drawback is that although we will still cash flow, we will be sacrificing some cash flow to get another property.  I am struggling to find a "right" answer.

Refinancing two properties to get another one-bad idea?

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