Should I Refi to Buy?

[Seth Kitchka]

Hey all,

I would really appreciate some advice on this, both on the refinancing of my SFRs and on a two duplex deal. I'm considering refinancing four of our SFRs to pull some cash for a down-payment on two duplexes. The duplexes are both two stories and on the same lot. All four units are occupied and rented for $550. I think they are under market rent and can bring $600-$650, but I'm not factoring that in to my calculations. That extra rent will be a bonus. Thanks for any advice.

1. First the refi...

Four single-family rentals we have built equity in by repairs. FYI values are $30-60k. Rents are average to low. We plan to increase rents total by $100/mo.

Current cash flow ~ $1,195/mo

Refi cash flow ~$880/mo

Refi will pull ~$55,000

2. Now the deal...

Financing:

Potential purchase $80,000 per Duplex
$16,000 down (20%)
$64,000 @ 5% = $345/mo
double this since there are two Duplexes
$690/mo debt service for both Duplexes

Income:

$26,400/yr
Each unit is rented for $550/mo

Expenses:

Taxes ~$4,000, 
Insurance ~ $1,600
Lawn care/snow removal ~ $2,400
Maint. reserves ~ $2,400
Factoring a 7% vacancy (7% is conservative for the area)

NOI ~ $14,152

Cash Flow: $5,872
$14,152 - $8,280 (debt service) = $5,872

ROI: 18%

Cap Rate: 8.8%

COC: 40%
$14,152 / $35,200 (downpayment + closing cost) = 40%

3. Cash Flow...

We factor in $100/mo per building for reserves when doing cash flow.

Current cash flow ~ $1,195/mo
Refi cash flow ~$880/mo
Refi plus the duplexes ~ $1,370/mo

All right, tear it apart!