What would you do next?

Question

Hello BPers

Curious to hear what would be your next steps on this type of property. HELOC or Cash out refi.

I just completed the rehab to the top unit of my Duplex and placed a great tenant. Purchased the duplex in 2016 with tenants living there and rents were below market. since then I replaced both tenants and completed rehabs in both units.

Numbers:

Purchased 2016 - $52,000. Cant find these deals anymore

Mortgage balance $29,000

Monthly Mortgage $290

Rents before rehab $1000

Rents now 2020 - $1600

total rehab for both units $16,000 -$17,000, New roof also

I believe it should appraise between $120K-$140K. Not many duplex comps in area but area is growing rapidly with renovations and new construction 2 miles away.

Im thinkig HELOC as I never did a cash out refi so Im not that comfortable exploring it yet. Looking to hear your thoughts if this was you what would you do? Thx

David Clay · Answer

I think it depends on what you want. If you want to develop more cash flow to pay for your life then I would only do the HELOC so I have access to the equity when I need it to do more deals. However, you could cash out and use that access to buy more deals. I would ensure that the mortgage stayed below the cost of rent for a single unit to avoid having to come out of my pocket for the mortgage. @Joe Villeneuve I'm counting his cash flow at $960 monthly given the numbers he used. He just did a rehab so he shouldn't have much in the way of significant repairs in the near future. Thus, I counted 40% of $1600 for operational costs (CAPEX, maintenance, vacancy, etc.). Is this a % you would use? In any event, this is the way that I would look at it, but I sometimes struggle with trying to make this decision. I have a unit I'm waiting to do a rehab on. Significant work is needed - maybe 30k plus on a 2/1 that I paid 30k for. Rent will be $600-$700 when finished, but I'll own it free and clear. Refi out my cash or just ride with it for the cashflow? ROI is better with a refi, but I like the security of not having a mortgage. Eventually, I'd like to have all my units mortgage free. Free and clear properties allow for a nice cash flow life without having to own too many units to pay for it all. Decisions, decisions. Nice to have options or to be in a position to worry about such things.

Nathan Gesner · Answer

You don't provide enough information to make a decision.

Your calculation of cash flow should be INCOME - EXPENSES = CASH FLOW. You only list your mortgage payment. What do you pay for taxes, insurance, HOA fees, utilities, etc? Are you setting aside approximately 10% for maintenance, capital expenditures, and other projected needs?

Joe Villeneuve · Answer

Where do you see enough info to arrive at that number for CF.  All I see is "rent" and "mortgage pmt".  The rest are guesses and have no place in an analysis,...unless you are allowed to use any numbers you want by the Property Manager, the tax collectors, the insurance companies, the repair companies, the utility companies (in case of vacancy), replacement companies (HVAC, driveway, roof, plumber, etc...) and title company.  All of these "numbers" are already defined and specific to the property.  Why use "guessing"?

I'll take the cash (equity) from your paid off properties, and invest into more leveraged properties (long before your property's equity gets to 100%) and exponentially increase my CF to a total well past your total...and much, much faster.

Craig Sloan · Answer

@Kriston Johnson I would encourage you to do the LOC.   IMHO the advantage of the LOC is that it allows you to keep your payment low but have cash available if other opportunities present themselves.  If they do you can use the LOC to fund those opportunities.  We have used several LOC over the years to fund rehabs, make other acquisitions and for a variety of other purposes.  In a game where cash is king, it is always nice to have some that you can access quickly without needing someone else's approval.

Joe Villeneuve · Answer

What's the cash flow?

What would you do next?

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