Refi or cash-out...?

[Sebastian Koellner]

Hi everyone,

I am looking for a reality check here on the scenarios below.

A few general notes up front: the property in question is in Germany, thus the € amounts. Some things with respect to loans work a little differently over here (i.e. points, pre-payment penalties, loan duration), but for the purposes of the question, this should not matter too much. I have further (over)simplified some things, as I am looking for input on the general logic (thus, rent increases, appreciation etc. are not factored in).

So, here it goes:

We bought a condo in the spring and fixed it up. The transaction at the time was all cash, as I didn’t have my job long enough yet to qualify for conventional loans. Now we are going to refi the condo.

The condo is rented out for €420 a month, leaving €179 after all expenses (including HOA dues, taxes, repairs, 20% vacancy allowance, and a theoretical property management fee). ARV (official bank valuation) is €47k, total capital invested (purchase, closing, renovation, holding) was €37k.

The two financing scenarios are laid out below. To allow for comparison, each option is based on a 15 year loan period (meaning ARM 15) with annual principal payments of 2%.

Option A - 70% LTV - €39,000 at 2.2%

monthly payment - €115

net cashflow monthly - € 64

annual tax credit - € 165

remaining loan balance after 15 yrs - € 21,219

total income over 15 yrs - € 13,946

net capital (w/o opportunity cost) - € 25,627

net capital with 5% rate of return p.a. - € 61,124

Option B - 100% LTV - €47,000 at 2.4%

monthly payment - €170

net cashflow monthly - € 9

annual tax credit - € 177

remaining loan balance after 15 yrs - € 30,114

total income over 15 yrs - € 4,224

net capital (w/o opportunity cost) - € 21,110

net capital with 5% rate of return p.a. - € 71,819

Given the low interest rates and the plan to buy more properties this coming year (fix and flip and/or buy and hold), I am leaning strongly towards maxing out the available capital for more deals… especially since the analysis is conservative at an expected rate of return on available capital of 5% p.a.

Which option would you choose? And, more importantly, have I overlooked any critical variables that factor into the decision?

Thank you for your input!