Should I refinance or not? (With numbers)

Question

My question is, should I refinance and get as much money out as I can, or not?

Specifics:

Duplex, bought/rehabbed for $210K ($60K of our own money)

We owe roughly $150K.

ARV: $265K

Interest rate on current loan: 4.875%Current Mortage/Taxes/Insurance: $1,100/moCurrent Rent: $1,200/mo each side ($2,400 gross/mo)Cashflow: $600/mo

We have spoken with two credit unions (and will look into more) and here is what the numbers look like.

Lender 1: Will lend 70% LTVClosing Costs (Not including an appraisal): $6,900Interest Rate: 5.75%New Mortgage/Taxes/Insurance: Roughly $1,450Cash Out Refi would be roughly $28,600New Cashflow: Roughly $250/moMoney into deal after refi: $31,400

Lender 2: Will lend 75% LTVClosing Costs (Not including an appraisal): $7,000Interest Rate: 6.25%New Mortgage/Taxes/Insurance: Roughly $1,600Cash Out Refi would be roughly: $41,700New Cashflow: Roughly $100/moMoney into deal after refi: $18,250

We don't necessarily need the refi money to do another deal or two this year but it would obviously help although it would decrease (I think) the amount of money lenders would be willing to give.

Does it make sense to refi even though we won't get close to all of our money out of that first deal, have a much higher interest rate and decrease cashflow by over 50% or would it make sense to keep our money in that deal with the much better rate and not refinance?  I understand that there will be various opinions on this but am just trying to get some other points of view that might give us some direction.  Thanks in advance!

Ryan Cash · Answer

@Dick Stevens I budget 5% for future Vacancy, 5% for Maintenance, 10% for Cap Ex, 8% for Property Management so I don't count those $ figures toward my cashflow.  I am happy with a 12% return on my first property even if I can't write home about it! Thank you!

Cory O'Dell · Answer

Nothing wrong with a cool 12%

Dick Stevens · Answer

Why is your net profit only $600 if gross rent is $2400 and mort/tax/insurance is $1100?  Where is the difference of $700/month going?  Right now at $600/month profit you’re only at about 12% cash on cash return which isn’t anything to write home about.  I’d be cautious in your next deal.

Ryan Cash · Answer

@Mike McCarthy Thank you for your insight.  I was leaning on not refinancing due to the payoff being so low and interest rates being much higher.  Your math made sense and I didn't look at the break even time frame.  I won't be refinancing this property in order to keep the cashflow and use that toward future deals. Appreciate your feedback as it helped tremendously!!

Mike McCarthy · Answer

How long do you plan on keeping the property? I don’t think it’s as much opinion as it is just math.

If you refi, you’ll get $23K or $35K back (taking out closing costs), but you’re losing your cash flow to interest and closing costs.

Quick math shows that the break even is around 4 years.

So if you can do without that $20-30K for a few years, you’ll be better in the long run.

I would keep things as is. If you were taking about refi-ing for $80K+, it might be worthwhile, but not for that little cash out. (IMO)

(My quick math might be suspect, but you get the idea)