Re-finance my (2) 2-families or save to buy my 3rd multifamily?

Question

This is my first post to Bigger Pockets, however, been following for a while. My market is Albany, NY.

You can make pretty staggering net profits in this area. My biggest question now is wait another couple years and buy a third/fourth property or re-finance this summer one or both of my two families pulling out cash?

Here are my real numbers- both properties cost about the same amount in the same area and put the same amount down. These revenue #s do  not include general fixing/upkeep.

Bought the property for 89,500. Put 25% down payment= $22,375 down payment. Out the door to close all day was about 28,000-the fees and etc.

Current market value if I sold today: 120,000.

Since owing it for the last 2 ½ years the principal is down to 64,174.61.

Interest rate is: 4.750

Total monthly payment is: 348.20 a month (principal & interest)

Taxes: approximately $4,000 a year (city and school) or $333.33 a month

Water: Approx. $60 a month

Insurance: Approx. $100 a month

Rents- Apartment #1- $935 a month

#2- $1,000 a month

(1,935 a month total)

Debt each month is $891.

Income each month is $1,935.

Net profit = $1,044 a month

What should I do? Or in other words-Pull out the 25,000 give or take I invested in each and put that into another building- or wait and do it slower not re-financing. I am 39 years old.

Thanks.

-mike

Jerid Meagan · Answer

@Michael Smith,

In response to the closing costs associated with a refi, to offset you may want to consider closing at the beginning of a month versus the end of the month. Remember, your first mortgage payment after closing is typically not the following month, but the month after the following (so around two). If your closing is scheduled at the beginning of the month you will have almost two full months of rent without any debt service to offset it. Using your numbers, if you close on say 12/2/19 your first mortgage payment will not be until 2/1/20, and you will have collected Dec and Jan rents without a debt service payment ($3870 in rents with no debt service of $1782). In actuality these rents will essentially cover all/most of your refi.

A lender may tell you that by doing this you will be paying more in prepaid interest, but run the numbers and typically the rents are greater than the daily interest and that's factoring in the the time value of money.

@David Alvarado, @Kevin Buckley, @Andrew Postell

Andrew Postell · Answer

@Michael Smith Some basic things to keep in mind:

• Most multi-family cash out loans will have a limit of 70% of the ARV of the property.
• And you will have closing costs to factor in as well

So if your value is $120,000, then 70% = $84,000.  Let's say $4,000 in closing costs...so a net to you of $15,000 or $16,000 per property?  Somewhere in there.  Now, it still might be worth doing but use those numbers and see where you feel you are with the choice.  Feel free to ask anything additional if you need.  Thanks!

Kevin Buckley · Answer

While I like the idea of expanding your portfolio, you need to look at the costs of refinancing as well as the new cash flow based on higher mortgage payments (Are you going to get a better interest rate?). If you refinance both properties, you will probably have two closings; therefore twice as much costs. The costs will be similar to the costs you incurred at the original closing (title search, bank fees, recording fees, lawyer fees, NYS mortgage taxes, etc.) These costs can significantly impact what you expect to receive at the closing.

As long as the numbers work and you have appropriate reserves, I would say go for it.

David Alvarado · Answer

Numbers look great and with that cash tied up I'd look to recapitalize and reinvest. That is the great thing about the BRRRR method. Ultimately, however, this all boils down to your risk tolerance.

If you do plan to refi, one thing you'll want to keep in mind is not over-leveraging yourself because you could end up in a situation where a property could be underwater. Based on your numbers, initial investments and current loans, it looks like getting your invested equity back would still leave enough implied equity to give you a buffer.

One other thing you may consider is taking some of the capital returned and setting that aside as reserves so that in the event something happens as you buy more, you have capital set aside as your cash flow will decrease with the higher debt service. Just my $.02.