All Forum Posts by: Daniel K.
Daniel K. has started 3 posts and replied 17 times.
Post: Hungry 24-year-old ready to find off-market deals and put in the work 💪
- Posts 17
- Votes 10
Hi Justin, I'm a local Chicago real estate investor who was in your shoes just a couple years ago. I'm happy to connect and share my experience if it would interest you!
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @V.G Jason:
Quote from @Adam Michael Andrews:
You’re going to buy back a bond from them worth X and reissue one worth Y. The difference in value is going to be about $235k. I wouldn’t touch a 3% mortgage under pretty much any circumstance on a 30 year term. There’s no free lunch here, just you making a bet against bonds and doubling down on real estate. That may be a bet you want to make but thinking about it as “tax free $235k” is the wrong way to analyze it
That plus the asset is the debt, not the triplex. I hold onto the note before the property.
Assuming you have reserves for the property, if you want to convey your view as pro-property or pro other assets-- I would take the net cash flow from rentals and invest that eventually into another property/equities/assets,etc.
Last, but not least, you're likely not the sharp at the table but you have the best hand. The bank knows the 10 year is going to come down in the short term(3 months to 36 months) and are selling you it before it drops. Like Adam said you're betting against bonds. And I'm saying you're betting against the house, yet you have the pocket aces in hands. In the event the 10 year rises, your note is even more valuable for you to keep.
Don't fumble this one. It's never clear, especially not in this administration, but you'd be basically buying a falling knife in re-fi form.
Your return would need to be gross 10% to break-even(tax adjusted 7%).
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @Don Konipol:
Quote from @Adam Michael Andrews:
Quote from @Don Konipol:
Quote from @Daniel K.:
During the pandemic, I bought a 3-unit house hack on the north side of Chicago for $580k with a 10% down portfolio loan through a local credit union. I renovated it, moved out, and it's since been a great investment, now cash flowing significantly with a 3.625% 30 yr FRM. Earlier this week, I got an email from the credit union holding the loan with an unexpected offer. They are willing to allow me to cash out refinance the property with a 30 yr FRM at 5% at up to 90% LTV. A recent comp sold that leads me to believe a reasonable valuation for the property of $800k. My loan balance is about $485k. These terms sound almost too good to be true, the catch being that I need to replace my rate with one nearly 140 bps higher (which is still significantly below market).
Were I to refinance at 90% LTV, my cash flow would evaporate entirely, and I might be slightly cash flow negative until next year when I can raise my below-market tenants’ rents to market, at which point I’ll be modestly cash flow positive again. But at the same time, I will have $235k tax-free in my bank account to put towards another deal which I intend to be cash flow positive. That same amount of money would probably take 10 years to earn via cash flow, and even then I’d have to pay tax on it.
What are the risks of taking this offer and leveraging up again? 140 bps interest rate increase doesn't seem all that bad. I know home values have been softening across the country, thankfully Chicago still seems to be going strong (at least for right now). Should interest rates drop below 5% for conventional mortgages, I know I can't refinance down if my LTV is too low, but other than that? Thanks.
The math works like this
Current annual interest on $485,000 @ 3.625% is prox $17,500
Annual interest on $720,000 @ 5% is $36,000
Difference is $18,500 for $235,000 is equal to 7.9%.
the math isn’t exact because we haven’t accounted for amortization or the difference in term of the new loan vs the existing loan.
The other thing is that the OP states that the bank offered a loan up to 90% - I wouldn’t be surprised if (1) after he applies they decide that 80% is max and (2) they add points and closing costs which further ups the break even higher than the 7.9% I calculated and (3) the banks appraisal of the property is a lot more conservative than a “unbiased” appraisal. Look, appraisers hired by banks know what the lender is “looking for”. Appraisals can easily vary by 20% on all but “cookie cutter” type real estate.
Thanks for this insight. The existing loan is a 30 yr amortization. I'd thought about a second lien option as well to tap some equity, but I don't think I'd find anything close to the terms of this one with 90% LTV, most seconds on investment 3-unit properties seem to max out around 70-75% CLTV.
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @Erik Estrada:
A 5% rate when rates are hovering in the mid to high 6s on a conventional refi is very good. The real question is, where would you put the money and will it yield you a higher than 5% return? Also is that rate on a 30 year fixed term or an ARM?
The refinance was offered as a 30 yr FRM
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @Adam Michael Andrews:
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
It's sounding like the consensus is that if I can find a return higher than 5%, it makes sense to refi, potentially not all the way up to 90% LTV
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @Aaron Zimmerman:
Can you share the name of this lender?
id make sure this lender is reputable first. Other than that, you're paying more in interest, so id make sure there's at least some cash flow.
the question becomes what property can you buy with the extra cash and how much wealth and cash flow can that generate?
the only downside would be you're paying extra interest if you don't find a deal but tbh, you can put in a money market for 4% and the spread between what you can earn vs pay in interest is pretty low.
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
Quote from @Brie Schmidt:
Quote from @Daniel K.:
During the pandemic, I bought a 3-unit house hack on the north side of Chicago for $580k with a 10% down portfolio loan through a local credit union. I renovated it, moved out, and it's since been a great investment, now cash flowing significantly with a 3.625% 30 yr FRM. Earlier this week, I got an email from the credit union holding the loan with an unexpected offer. They are willing to allow me to cash out refinance the property with a 30 yr FRM at 5% at up to 90% LTV. A recent comp sold that leads me to believe a reasonable valuation for the property of $800k. My loan balance is about $485k. These terms sound almost too good to be true, the catch being that I need to replace my rate with one nearly 140 bps higher (which is still significantly below market).
Were I to refinance at 90% LTV, my cash flow would evaporate entirely, and I might be slightly cash flow negative until next year when I can raise my below-market tenants’ rents to market, at which point I’ll be modestly cash flow positive again. But at the same time, I will have $235k tax-free in my bank account to put towards another deal which I intend to be cash flow positive. That same amount of money would probably take 10 years to earn via cash flow, and even then I’d have to pay tax on it.
What are the risks of taking this offer and leveraging up again? 140 bps interest rate increase doesn't seem all that bad. I know home values have been softening across the country, thankfully Chicago still seems to be going strong (at least for right now). Should interest rates drop below 5% for conventional mortgages, I know I can't refinance down if my LTV is too low, but other than that? Thanks.
I am familiar with the credit union and loan program you did. Do they know you no longer live at the property? Either way I can tell you that is the best deal you will find unless rates go down significantly. Typically cash out refi are .5% higher than the market rate and for non owner occupied properties that LTV is limited to 70%
Yes, when I spoke with them on the phone I was clear that I no longer live in the property, and they were alright with it.
Post: Sacrificing my pandemic era mortgage rate for a crazy cash out refinance offer
- Posts 17
- Votes 10
During the pandemic, I bought a 3-unit house hack on the north side of Chicago for $580k with a 10% down portfolio loan through a local credit union. I renovated it, moved out, and it's since been a great investment, now cash flowing significantly with a 3.625% 30 yr FRM. Earlier this week, I got an email from the credit union holding the loan with an unexpected offer. They are willing to allow me to cash out refinance the property with a 30 yr FRM at 5% at up to 90% LTV. A recent comp sold that leads me to believe a reasonable valuation for the property of $800k. My loan balance is about $485k. These terms sound almost too good to be true, the catch being that I need to replace my rate with one nearly 140 bps higher (which is still significantly below market).
Were I to refinance at 90% LTV, my cash flow would evaporate entirely, and I might be slightly cash flow negative until next year when I can raise my below-market tenants’ rents to market, at which point I’ll be modestly cash flow positive again. But at the same time, I will have $235k tax-free in my bank account to put towards another deal which I intend to be cash flow positive. That same amount of money would probably take 10 years to earn via cash flow, and even then I’d have to pay tax on it.
What are the risks of taking this offer and leveraging up again? 140 bps interest rate increase doesn't seem all that bad. I know home values have been softening across the country, thankfully Chicago still seems to be going strong (at least for right now). Should interest rates drop below 5% for conventional mortgages, I know I can't refinance down if my LTV is too low, but other than that? Thanks.
Is this a 2 bedroom apartment that is currently being leased (in the eyes of the CHA) as a 1 bedroom apartment? If so, you will need to apply for a change of number of bedrooms on the standard CHA rent increase form. They will schedule an inspection to verify that the second bedroom does in fact exist in the apartment.