Do these numbers support cash out refi?

Question

I bought a rehabbed home about a year ago (turnkey-ish), which has cash flowed nicely and also appreciated significantly since. Given the appreciation, it appears I may be able to do a BRRR (rehab R missing) and recoop my initial investment. The only question in my mind is whether it's worth eliminating the cash flow to redeploy that initial investment. The tenant is about to re-up for a two year lease at her current rent, which is now below market (trade off, I'd rather reduce the turnover than risk scaring her off by bumping up the rent). Anyways, based on the below numbers, what would you do?

Current State

Purchase price: 77500
All in: 23902
Balance: 57038
Rate: 4.125
Monthly P&I: 281
Monthly Insurance: 82
Monthly Taxes: 135
Management: 76
Monthly Vacancy Reserve: 48
Monthly Capex Reserve: 85
Monthly Repair Reserve: 59
Rent: 950
Monthly Cash Flow: 202

Possible Refi

Zestimate now (Zestimate was accurate -- within 1k -- at time of purchase): 108346
New loan (75 LTV, with 3k for closing): 84260
Estimated New Rate: ~5.125
New Monthly P&I: 281
Cash out: 24000
...
New Cash Flow: 33

Ben Wilkins · Answer

@Nolan O. - your Monthly P&I and your New Monthly P&I are the same number, so I say go for it! HahaOk, joking aside, I'll assume that your new monthly P&I is closer to $450 per month. My philosophy: equity reduces cash flow by decreasing the number of investments that you have. I will always leverage in order to increase overall cash flow even though it decreases the cash flow from the leveraged property.That said, this strategy only works if / when you can leverage and still produce cash flow.You only have three options in your case:1. Leverage for less than $24,000.00. You can pull $15,000.00, which will increase your cash flow by roughly $50 per month (giving new cash flow of closer to $80 per month). This won't give you all of your cash back, but it gives you $15k more to invest with.2. Increase your income. If you have a tenant that is willing to sign 2 years, you can bet for sure that you're under market value and she's getting the winning end of this deal. She's been at the same rent for a year (at least), and she's locking in to the same rate for the next two years? Suggestion: go to RentJungle or another comparison website and determine a fair market rent value, and increase your rent to match (or be slightly below). Don't lock in to anything longer than 1 year unless if you have a rent percentage increase worded in the lease.3. Best of both: combine the above options. You don't really have the option of cutting expenses - you look like you're already running fairly lean. If you increase your income and take out a partial refi (not a full 75% LTV), you can very likely increase your overall cash flow by purchasing a second property.

Jason D. · Answer

I would probably not cash out in the scenario you have. I think the cash flow on the property would be too tight for me to be comfortable, unless you have a reasonable expectation that the current appreciation will continue. That being said, it depends on what you plan on doing with the $24k you are getting back. If you can invest that into a homerun deal that cash flows $500 a month, then it may be worth the re-fi.

John Leavelle · Answer

@Nolan O.I apologize if I sounded terse and uncaring. That was not my intention.The point is you are trying to make a business decision. "Should I do a Cash-out Refinance to expand my business?" Your current property expenses will eventually increase. So your income must keep pace with those increases. Or you may end up with negative Cash Flow. $33 per month is a little to slim to me to commit to the Refinance. You could do two things to improve the problem. Increase the rent a little, say $25 more. And as @Ben Wilkins suggested don't take as much equity out. Try to keep as close to $100 per month cash flow as possible. If these are not acceptable options then you may need to save up the cash required for another purchase. Or find alternative financing options. I also agree to the point of leveraging one property to get additional Cash Flow in another. I truly wish you success in your investing.

Harjeet Bhatti · Answer

When you cash out $24000 from this property the question where you will spend that money and what will be income from that investment. Counting everything and see if that makes sense to cash out from this property. You have good cash flow and lower interest rate but your money is block in this investment.

Christopher Wedde · Answer

So to pose a question/avenue as a new investor, since I will most likely have a similar problem in the future, and trying to look at this a different way. Could you get a HELOC on the property? It would give you access to the equity. This option seems viable to me in this situation.

Steve K. · Answer

@Nolan O. ....firstly, congrats...it was a good purchase, if it's value is up almost $31k in a year!At $950/mo rent, you had 1.23% of purchase price at $77,500.....now you have 0.88% of purchase price (at $108,346 appraisal)....that's shrinking your cash flow to $33/mo.If the property appreciated 40% since deciding $950 rent, doesn't it deserve to have rent increased? You said yourself it was below market. Your $202/mo net cash flow is 10.1% cash on cash against your $23,902 cash in. (decent for a turnkey, but not stellar for BRRRR with rehab profits). Notice that if you acknowledge your new ARV, you now have $54,748 (cash and equity) in the property. The $202/mo (keeping the old mortgage) feels now like a 4.4% cash on cash return.I'm a big fan of BRRRR; I'd normally advise you to take your $24k cash out refi and "repeat" with another property. Even though you lose 1% APR on the new loan, if you get a great ROI on the new project, I believe you can put your $24k to work at a much higher return.If you thought of this in terms of "opportunity cost", would you buy this property for $108,346 today and accept just $950 rent?You could sell, or raise rent????

Nathan Yee · Answer

If you stuck with existing property...Have you considered all ways to minimize monthly expenses? For example, are all/or certain utilities being paid by tenant? I agree with the above, it looks like you're running pretty lean now, but still worth exploring.Have you considered additional ways to raise rents? With the existing property could you use some of this refinance money to rehab, force appreciation, and raise rents (if increase is supported by the market)? Have you looked at multiple lenders for the better refi terms?If you purchased another property...Would you cashflow more than if you owned just the current property? Leveraging may make sense to get better return on your equity. Are you in a market where you may benefit from appreciation? Would you benefit from additional loan amortization and tax benefits? If you go this route, hopefully yes to all.

Nolan O. · Answer

Thanks, @John Leavelle. The options you raise seem just about right.@Marcus Johnson, I am not certain what the appraised value would be.

Marcus Johnson · Answer

How can you be sure that's what it's worth? Have you had an appraisal done yet.

Nolan O. · Answer

Wow, @John Leavelle! Where did you get that I was driven by fear?! I didn't realize I was putting that vibe out there. Does the risk of running out a good tenant scare me? Sure it does. Does the greed make me want to up the rent? Yes, absolutely. (I personally feel that greed can be just as blinding an emotion as fear.) But the numbers ARE what I'm looking at when deciding to incentivize her to reup for a longer period. Turnover would cost me many times a year's increase in rents. With the break even point years out, risk/reward analysis told me to incentivize her to stay. Had this been a multi that would appreciate on improved NOI, the analysis might be different. I appreciate your thought and wholeheartedly agree with your underlying premise of making business decisions based on data and analysis. That's why I'm asking for input on how others interpret these numbers. (I wanted to do a peer review on my analysis.) I apologize if I'm coming off as snappy here, but I must say, it's a little off putting to be called an emotional decision maker.