So, (clearing my throat), I recently refinanced my best rental and I got $26K coming my way next week! We had a great time sitting with Wendy Souza, notary public out of Mission Viejo, last Thursday to get our closing docs all done. Wendy, Jessica, and I discussed topics such as life after divorce, romance, dancing, cooking, kids, all while signing and dating like 100 pages of dry and boring, real estate legal docs. I wanted to give Wendy a shout-out because she was extremely personable...and I like helping people!
Back to the topic of this article though. So, refinancing my best rental was a process I began last year in November. The timing was perfect. Let me explain some things first. What do I mean by, "your best rental property"? Well, if you have multiple rentals in your portfolio, this means look for the one that has appreciated the most AND, and I stress, AND, the one who also has the most cashflow. This means that when all expenses are factored (taxes, insurance, maintenance, property management, etc.) you have a nice monthly payment coming into your investment checking account.
Appreciation is key, however. Remember that the best you'll get on a refinance is between 60-75% LTV (Loan-to-Value) from a bank. Example: If your rental can appraise for $150K, you'll get a new loan for up to $112,500, using 75% LTV. So if you owe, say, $65K on the property after paying down the mortgage...correction...after your tenant(s) have paid down the mortgage...hehehe! Then you can expect to get a cash-out check in the amount of about $44,000 because you'll have some closing costs. Also, you have to decide based on your numbers, whether or not you want all this cash, and not a lesser amount.
Why a lesser amount? Well, consider that when you refinance your rental, the new loan will include a higher mortgage payment. Taxes and insurance should stay around the same, unless you upgrade your insurance premium to account for the new appraised value. All this means that the rental will have less cashflow. That's why I suggested above that you select the rental with the best cashflow. So that you can pull as much cash out on the refinance AND still cashflow on that rental each month (albeit, a lot less).
Let me give you some rough numbers (although I did calculate the scenario to its entirety for my situation, just don't have the exact number here for you). So for my best rental refinance, I'll be cashing out $26K. At first, my lender (Wells Fargo agent, Dusty Carrol out of Oceanside) thought my rental could appraise for $150K. The appraisal process is independently done by an appraiser and you have no say as to what you think the property is worth. They do their thing, and report back to the lender when done. Our rental came in below $150. It was somewhere in the high $130K's or maybe even $140K. Can't recall right now. The point is, this determined my cash out amount, and my subsequent mortgage payment at the investor rate interest I locked in (6.5%).
My new payment including mortgage, taxes, and insurance is $911. My rental is rented for $1250/month. I pay $125 to property management company. This leaves me with $214 cashflow. However, I also pay $26 HOA dues per month or $315 annually. Now I'm at $188. $188 doesn't factor in any maintenance issues that can arise. These are rare right now as my property in Cordova, TN is fairly new (this century) and flipped in 2010. However, if an issue arises, it's coming out of that $188 cashflow, and my reserves. So you can see, pulling equity significantly reduced my cashflow position on this rental. And if I were to simply go out and spend all that money on stupid things, like a new car, a home makeover, a family vacation, etc...things that are not going to give me a return on my money, then this is a waste of a refinance.
But I'm not! Duh! I plan on utilizing this cash windfall to buy, you guessed it...another out-of-state rental property! I already have lined up the turn-key wholesale company that I'll be working with. In fact, I'm on their waiting list for a new property in August of this year. Yes, waiting list. You see, they have so many out-of-state investors from New York and California, that they need to put us all on a 6 month waiting list. According to their multiple sales examples, my new rental will average between $325-$375 cashflow per month. It will cost me between $55K to $80K, depending on how I shop for their available inventory when I get called on. Thus, this new rental will more than replace the cashflow I lost from refinancing, and then some. I'll be adding to my portfolio, meaning adding to my asset column, and improving my cashflow per month! Win, win.
Why Refinance Now?
According to what I've been reading lately, home price appreciation is stalling. They're no longer appreciating as quickly, if at all in some markets. Google it if you don't trust me. Anyway, it's likely your rental property(ies) are due for some refinancing consideration. After all, mortgage rates too have stopped rising thanks to the Fed slowing their roll. Investors have to pay investor rates, but they're still quite low. I got a 6.5% rate in January. You may be able to lock in a lower one.
Cash is king right now. Not because you'll get higher interest rates for stashing your cash away in a Money Market account and forgetting about it. Inflation is on the rise, especially for goods. Rather, cash is king because of the impending recession! Yes, it's bound to happen sooner or later. You'll want to have cash on hand to scoop up assets at discount levels after the fallout settles.
If property values stall, or even fall, you may be able to buy your next rental at a better price! And, if rates are kept the same by a Fed that doesn't know how to proceed...heck, they may even decide to cut rates if a recession happens this year, you may be in store for even better rates on your investor purchase.
Should I Refinance My Personal Residence?
Yes, if you are disciplined enough to not fall for the trap that is home improvement. Home improvements will make no difference to your monthly cashflow (how much you keep at the end of each month). You can pay down your high interest credit cards so you have more money available to you at the end of each month.
Or, if you don't have credit card debt, put your refinance cash into buying your first rental property! Or your next one. Anything that puts money in your pocket at the end of the month works. Just please don't go on a vacation, or buy a new car. Don't do anything with that money that will entrench you even more in the Rat Race that is your life already.
With that, I say, adieu mes amis. Hasta la proxima. Holla back!
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