I have a SFR that I put down $50k on about 10 years ago. It's been cashflowing $500-$600/m. I have the opportunity to cash out refi now and receive a max of $180k cash out after fees . That would put me negative $150/m in cashflow though. However, I could purchase 2 more properties and be at $1200-$1500/m net cashflow after all work and rented out
I’m confident I can increase the rent ok the first and make back that $150/m so it’s neutral in 1-2 years too.
Is this not a no brainer? Does it matter if one property is in the negative if the portfolio is positive?
Yes...this is a no brainer. If you can refi it out and get $180k...what can you get if you sold it? Then take even more money, and increase your cash flow without having negative cash flow.
Yes...this is a no brainer. If you can refi it out and get $180k...what can you get if you sold it? Then take even more money, and increase your cash flow without having negative cash flow.
The issue is if the property is going to be negative cash flow forever. A few months of negative might be ok, but effectively, you’ll be paying someone $1,800/yr to live at your property.
You might be better off just selling it, get your $180K out, and go find another property/properties that do cash flow even with a mortgage.
The alternative would be to only pull $100K or so out of the property, it’ll still cash flow a bit, and you’ll have some money for other investments.
@Joe Villeneuve I think the appraisal was a bit overvalued. If I sold it I could prob net $270k
I may have enough money left over after buying the other 2 properties to come back to this one and renovate the basement and add a bath which should further increase long term value but also allow me to be at $500/m positive cashflow on that
property.
How do people generally decide when to refi vs sell? This property is by NYC and has doubled in value in 10 years with almost no work put into it so I think it’s a good long term hold...
Any money you put back in, rehab or paydown, must be recovered before you start making a profit. This means you have to look at the new cash flow, and how much total you have put in (your money...not the tenants), and calculate how long it will take to recover the cash you put in. Let me give you an example of three different options on different deals. Tell me which one you think is better:
when to refi vs sell? This property is by NYC and has doubled in value in 10 years with almost no work put into it so I think it’s a good long term hold...
When to refi and when to sell to me are 2 separate questions.
I'll refi when I want to keep the asset and have opportunities to lever up in my market. Real opportunities,. Specific properties like it sounds you have. Also good loan terms and cost of capital/ refi costs below 7% of what I receive.
When to sell depends on other factors to me. Maybe it's too nice to be a good rental. Facing lots of cap ex. Good tax fit that year. Lofty value. Top of cycle. Employer vacating. Headache property. Not local anymore. Local laws, rules, regs, tax rates, etc have changed. Bigger picture stuff.
@Sam Bromano would it be more beneficial just to sell?
When you say negative, is that income less than mortgage? Because if that's the case, selling is a no brainer. If its income less than mortgage plus appropriate reserves, I could see leveraging and keeping
Income less the new ballooned mortgage amour after i borrowed up to 75% against it. The rent I’m charging is under market though. If I raise it to market it’ll be slightly above so I may just do that..
A good reason to refi instead of selling would be avoiding the capital gains tax you would pay upon selling, if the property has appreciated significantly, which it sounds like it has.
You are correct that you should evaluate decisions holistically across your whole portfolio. If this would increase your overall cashflow, and allow you to benefit from more appreciation potential and principal pay down, and your reserves are sufficient, then it's a no-brainer.
I am big on the BRRRR strategy but in this case I think I would sell. Great time to sell and you can buy two more properties, doubling your cash flow from $600 to $1200.
If you refi, what is the term on your loan 15, 20, 30? If it’s a 15 or 20 and even though it is cash flow negative but it’s still enough to cover a good majority of the principal you are paying down, it might be worth it to keep it - especially considering the fact that you could be at net 0 when you raise the rent.
Bottom line, now is a great time to sell, BUT are you confident in this market that you are going to find the two “deals” that cash flow $1200 combined with the money made from the sale? If the answer is “yes”, I say sell.
@Alan Grobmeier I'm newer to the landlord game, would you suggest holding indefinitely to avoid recapturing depreciation as long as properties cash flow? what's a good end game strategy for someone like me who has 9 30-year fixed loans that cash flow?
@Ryan McCook, I don't ever look at 'forever'. I look at 20-30 year timeframes.
If the property is no longer desirable, I would consider doing a 1031 exchange vs. an outright sell. I can trade 2 or 3 properties for 1 (consolidate) if I wish and have no recapturing of depreciation.
Otherwise, I plan on DYING with the properties. My heirs will have a new cost basis AND the depreciation will be wiped out. They will love me FOREVER. ;-)