Should I Refinance or Sell the Rentals?

Question

Before the pandemics, I used to Flip properties and now just managing Rentals at the moment until the foreclosures hit the market again.  Rentals have been great even through the pandemic and have no tenant issues so far.  So I have 4 properties with mortgages that I'm thinking of refinancing for 15 years to get the lowest interest rates.  But trying to think outside the box to see what would be my best option for my investment.  I would like to get some input from some of you experienced BP real estate investors whether I should:

A) refinance 2 of the 4 rentals with a mtg for a 15 yr at 3% (currently 30 yr mtg at 4.375% - 4.875%) and let the tenants pay off the mortgage in a shorter term and take my time to pay off the other 2 with lower mtg balance.

B) to sell a couple of them at current seller's market and pay off at least 2 of the mortgages with higher mtg balance which would save in tremendous amount of interest and take the extra cash flow to pay more into principal of the other 2 mtg to get it paid off quicker.

C) Or to refinance the 2-3 properties for 15 year mtg and sell the other 1-2 properties and invest the proceeds in the stock or cryptocurrency market and try to pay off the mortgages in the future with the gains.

I'm just wondering which would be the best scenario for the long run.  Any thoughts on this?  or Any better suggestions?

Joe Villeneuve · Answer

None of the above.  All three of them are just adding to your cost:

A)   You're not paying the interest, but when you are reducing your cash flow going with a shorter term, you ARE paying on the principle.  If you kept the longer term, and the higher CF that comes with it, your tenant is paying for both.

B) Never use your money to pay off mortgages.  All that does is cost you money since that money comes out of your pocket.  Let the tenants continue to buy the property for you.  If you want to do a REFI, take the money and invest it as DP's in your next rental of flip.

C)  Stop using your money to pay off mortgages.  You're not gaining anything, you're losing CF and profits, and adding to your cost.

ThomasRoy Penland · Answer

@Jay C.

I would steer clear of crypto and stock market because it’s a big gamble. Real estate is safer. If you want more cash flow, pay down what you have with a lump sum. Paying off properties is not bad. I have down so to increase my cash flow. It also allows me to take additional risks by purchasing rentals in newer markets which I am not familiar with. In turn, allowing me to expand with a good safety net. If you’re have a rate anywhere under 4%, I would sit on it and just slowly add more to the principal, or put aside a fund to pay it off when you can.

Jay C. · Answer

There's no prepayment penalties.  But I think I'll just hang on to them and refinance if I can still get some good rates.

Matthew Hopkins · Answer

@Jay C. I would like to preface my response by stating I am by no means an experienced investor, however, I do work for a nationwide mortgage lender. I merely want to present a few concerns that might help you in your decision. Do your current mortgages have any prepayment penalties written in the contracts? Depending on how long you’ve owned the homes and how much equity you currently hold, selling could trigger prepayment penalties which would clearly impact your profit margin. Just something to take into consideration. I hope the best for you in all your endeavors.

Greg M. · Answer

Closed maybe 2 months ago. Got the rate through a broker that only does SoCal properties.

Jay C. · Answer

Do you guys recommend any lenders for investments properties for a good rate for either 15 or 30 years?  I was leaning for 15 to get better rates but if I can get 30year term for a good rate then of course I would definitely consider 30 rather than 15.  I've been working with Quicken Loans and was told that there's a strict regulation for refinancing investment properties now compared to even a few months ago and not that many lenders are refinancing investment properties now.

Arthur Garcia · Answer

I would refi at 30 years and hold. If getting properties free and clear is the goal, use the excess cashflow to paydown principal if you want - this is the most "safe" option as it will allow you to add more payments and also give you breathing room if you have unforeseen events (personal or in the portfolio).  I don't know the dollar amounts we're talking about here, but if you shave off 10 years, 1-2% points won't be very meaningful.  Also, make sure to factor in the implications of future inflation on your assets.  Do a little research in this area if you're not familiar, core CPI doesn't really show true inflation in my opinion. If you are factoring 2-4% inflation over the next 10-15 years, it actually makes a little more sense to let time, your tenants and inflation do the heavy lift of paying down your mortgage.  If you need access to cash, I'd rather see you refi cashout if you need money than sell a unit. I think in about a year or two, people will look back at current prices and rates and wish they'd locked up more cheap debt.   Take care!

Jay C. · Answer

Thank you all for your inputs.  My goal was to shorten the length of the mortgage and pay less interest or eliminate the mortgage to not pay interest as soon as I can NOT because I need the FCF right now but to set it up for consistent FCF at retirement.  Though tenants are paying enough rent to cover mtg and interest, the sooner the mortgages are paid off, the sooner I'll have maximum FCF without a mortgage to worry about at retirement.

@Greg M. I do agree with you on having less number of properties with more FCF.  How long ago did you refinance for the 2.875% rate?   If recent, who was your lender?  I was quoted 2.675% a few months back but the rate increased.

Nathan Gesner · Answer

This depends on your goals. I prefer to remain leveraged and benefit from tax benefits while I grow my portfolio. When I'm closer to retirement, I'll probably consider reducing my leverage or even paying off the properties to reduce my risk and maximize my cash flow.

Greg M. · Answer

Without knowing your end goal it is not possible to say how you should approach this. Are you hoping to have the properties paid off, so in X years you can live off the much higher FCF? Are you hoping for a little FCF now to supplement your income? Do you not care about FCF and instead you're just looking to build up equity and gain appreciation for something else later on?

Some people on these forums look to have a lot of properties, each with very little equity, each throwing off a little FCF each month. That sounds like a (horrible) job to me that I get paid very little for. My goal is to have a few properties, all paid off by the time I retire, so at that point they can throw off a significant amount of money for me to live off. I'd rather have 10 properties that each FCF $1500/month than 150 properties that each FCF $100/month. There is no prize for owning the most number of properties.

Regardless of your end goal, you need to refinance ALL those properties. Those interest rates are awful. I just refinanced some investment properties and the 15 and 30 year rate was the same, 2.875%.

Should I Refinance or Sell the Rentals?

Most Popular Reply