Should I do a cash out refinance?

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dmk395
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Should I do a cash out refinance?

Post by dmk395 » Tue Nov 12, 2019 2:24 am

I own a few rental properties and I've noticed repairs on these older buildings are getting more expensive as my band aid repairs and just wear and tear over the year's is catching up. Rents have also risen quite a bit though. Long term tenant moved out in one building. With renovations the unit will rent for $300 more per month. I can do a cash out refinance, and take $50k (more than enough to do all the repairs in the building), plus allow me to replace two roofs on other buildings, , re-do the next vacancy (where I will be able to raise rent again if its a long term tenant) and still cover my new mini split system in my vacation home.

My mortgage will rise $180 per month. Looking at this I'd still net $120 more per month, with the increase in rent for the new tenant. The only downfall would be instead of having 25 years left on the loan, I'd now have 30, and of course a higher mortgage balance. I'd owe 150k on a house worth 275k, rather than owe 100k.

Just wondering what the other Bogleheads think.....

grettman
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Re: Should I do a cash out refinance?

Post by grettman » Tue Nov 12, 2019 6:48 am

Taking on more risk just for $120 a month? I must be missing something. If this is accurate, I wouldn’t do it.

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JoeRetire
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Re: Should I do a cash out refinance?

Post by JoeRetire » Tue Nov 12, 2019 7:13 am

dmk395 wrote:
Tue Nov 12, 2019 2:24 am
I own a few rental properties and I've noticed repairs on these older buildings are getting more expensive as my band aid repairs and just wear and tear over the year's is catching up. Rents have also risen quite a bit though. Long term tenant moved out in one building. With renovations the unit will rent for $300 more per month. I can do a cash out refinance, and take $50k (more than enough to do all the repairs in the building), plus allow me to replace two roofs on other buildings, , re-do the next vacancy (where I will be able to raise rent again if its a long term tenant) and still cover my new mini split system in my vacation home.

My mortgage will rise $180 per month. Looking at this I'd still net $120 more per month, with the increase in rent for the new tenant. The only downfall would be instead of having 25 years left on the loan, I'd now have 30, and of course a higher mortgage balance. I'd owe 150k on a house worth 275k, rather than owe 100k.

Just wondering what the other Bogleheads think.....
What is the mortgage rate?
Do you have other options?
Are you not saving maintenance money from the cash flow produced by the rental properties?
Very Stable Genius

Luke Duke
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Re: Should I do a cash out refinance?

Post by Luke Duke » Tue Nov 12, 2019 11:47 am

I'd probably do it. Rates are low.

How old are you and what are your long-term plans with your rentals? Acquire more? Sell them when you retire? Keep them forever?

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Watty
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Re: Should I do a cash out refinance?

Post by Watty » Tue Nov 12, 2019 11:55 am

dmk395 wrote:
Tue Nov 12, 2019 2:24 am
Just wondering what the other Bogleheads think.....
1) Ideally you would have been building up reserves to pay for repairs on the rentals like this since they are fairly predictable. It sounds like it is too late for that but you should make sure that you build up reserves to pay for future repairs.

2) It would make be very uneasy to use 30 year financing for repairs and refurbishing that would not last 30 years.

3) You said that you have several rental properties. I would take a hard look at selling one of them and using the funds to pay for the repairs instead.

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djpeteski
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Re: Should I do a cash out refinance?

Post by djpeteski » Tue Nov 12, 2019 11:57 am

Why not liquidate one or more of the properties such that you have the cash to do the repairs/renovations and have zero years left on the mortgage(s)?

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unclescrooge
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Re: Should I do a cash out refinance?

Post by unclescrooge » Tue Nov 12, 2019 1:51 pm

djpeteski wrote:
Tue Nov 12, 2019 11:57 am
Why not liquidate one or more of the properties such that you have the cash to do the repairs/renovations and have zero years left on the mortgage(s)?
Part of the attraction of real estate is the leveraged returns. If you aren't periodically refinancing and pulling cash out your returns drop over time.

I would definitely cash out to perform large repairs.

CMD1
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Re: Should I do a cash out refinance?

Post by CMD1 » Tue Nov 12, 2019 2:05 pm

I'm not a fan of taking on additional years via refinance, but my goal with our 1 rental is to pay it off, not maximize leverage. Perhaps yours is different. That said, if you need funds to maintain your property then either refi or a Heloc. Can you do the repairs over a couple years and mostly fund through cash flow?

Cash out refi will have a higher rate than a simple refi.

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dmk395
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Re: Should I do a cash out refinance?

Post by dmk395 » Tue Nov 12, 2019 2:53 pm

I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.

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JoeRetire
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Re: Should I do a cash out refinance?

Post by JoeRetire » Tue Nov 12, 2019 2:56 pm

dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
So you are saying you don't have enough in reserve and thus have no choice but to refinance. Okay. As you say, it's part of the game.

So what is your question?
Very Stable Genius

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dmk395
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Re: Should I do a cash out refinance?

Post by dmk395 » Tue Nov 12, 2019 2:57 pm

JoeRetire wrote:
Tue Nov 12, 2019 2:56 pm
dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
So you are saying you don't have enough in reserve and thus have no choice but to refinance. Okay. As you say, it's part of the game.

So what is your question?
I can access personal savings, but would rather not...

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JoeRetire
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Re: Should I do a cash out refinance?

Post by JoeRetire » Tue Nov 12, 2019 3:03 pm

dmk395 wrote:
Tue Nov 12, 2019 2:57 pm
JoeRetire wrote:
Tue Nov 12, 2019 2:56 pm
dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
So you are saying you don't have enough in reserve and thus have no choice but to refinance. Okay. As you say, it's part of the game.

So what is your question?
I can access personal savings, but would rather not...
Got it. But I think that's a statement and not actually a question.

If you are asking if it would be better to refinance than access personal savings, it seems like you would need to provide a lot more details as input.
Very Stable Genius

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dmk395
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Re: Should I do a cash out refinance?

Post by dmk395 » Tue Nov 12, 2019 9:07 pm

Luke Duke wrote:
Tue Nov 12, 2019 11:47 am
I'd probably do it. Rates are low.

How old are you and what are your long-term plans with your rentals? Acquire more? Sell them when you retire? Keep them forever?
My plan is to keep forever. I have 10 units. I'd acquire more but there's not much cash flowing now.

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Watty
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Re: Should I do a cash out refinance?

Post by Watty » Tue Nov 12, 2019 9:52 pm

dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
I don't follow it but this website is often mentioned as being a good place to get feedback from experienced real estate investors.

https://www.biggerpockets.com/

One of the prior posters asked for more information about what your rates are. If you could provide the details of your current mortage and what the numbers would be for a refinance that might help get better feedback.

One thing that jumped out at me in your original post was the comment "...and still cover my new mini split system in my vacation home." which sort of gave me the impression that you might be overextended.

Grt2bOutdoors
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Re: Should I do a cash out refinance?

Post by Grt2bOutdoors » Tue Nov 12, 2019 10:24 pm

dmk395 wrote:
Tue Nov 12, 2019 9:07 pm
Luke Duke wrote:
Tue Nov 12, 2019 11:47 am
I'd probably do it. Rates are low.

How old are you and what are your long-term plans with your rentals? Acquire more? Sell them when you retire? Keep them forever?
My plan is to keep forever. I have 10 units. I'd acquire more but there's not much cash flowing now.
Do it. Even if you initially breakeven, the repairs will improve the value of the properties. Don’t use your personal cash to finance the repairs.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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djpeteski
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Re: Should I do a cash out refinance?

Post by djpeteski » Wed Nov 13, 2019 6:36 am

dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
Is that surprising? You have a collection of people that share a common interest in simplifying their investments with advocacy of using a three fund portfolio. They earn their money some other way, and use very little mental energy to invest, which they believe provides the best returns.

Your question is probably best asked elsewhere considering the demographic of this board. Obviously real estate is a viable way to make money, but not a simple one. It takes hard work, the ability to assume risk, and a lot of mental, emotional, and physical energy. That goes against the Boglehead philosophy.

Topic Author
dmk395
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Re: Should I do a cash out refinance?

Post by dmk395 » Wed Nov 13, 2019 7:12 am

Watty wrote:
Tue Nov 12, 2019 9:52 pm
dmk395 wrote:
Tue Nov 12, 2019 2:53 pm
I'm 40. But I can see from the responses here not many here really owns a BUNCH of property. Repairs happen as properties age, its part of the game. Same as vacancy. While I do set aside reserves, when you have multiple vacancies all of a sudden, from long term tenants the reserves get drained....hence the refinance.
I don't follow it but this website is often mentioned as being a good place to get feedback from experienced real estate investors.

https://www.biggerpockets.com/

One of the prior posters asked for more information about what your rates are. If you could provide the details of your current mortage and what the numbers would be for a refinance that might help get better feedback.

One thing that jumped out at me in your original post was the comment "...and still cover my new mini split system in my vacation home." which sort of gave me the impression that you might be overextended.
Current is a4.75% 30 yr loan. Owe 100k. Value of property is 270k. I used the mini split system upgrade as a way to rationalize getting something out of this for myself lol
Refinance would be 4.75% on 150k. Payment of about $782, whereas my previous payment was $599. I can raise rents $300 to cover the larger payment with upgrades to a unit

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Watty
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Re: Should I do a cash out refinance?

Post by Watty » Wed Nov 13, 2019 8:52 am

dmk395 wrote:
Wed Nov 13, 2019 7:12 am
Refinance would be 4.75% on 150k.
That is a terrible rate if that is your primary residence, I am seeing places like Penfed with rates in the mid 3% range.

https://www.penfed.org/mortgage-center/ ... g-mortgage

What are the closing costs?

You really need to shop around.

1130Super
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Re: Should I do a cash out refinance?

Post by 1130Super » Wed Nov 13, 2019 1:53 pm

I would assume it’s not his primary

flaccidsteele
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Re: Should I do a cash out refinance?

Post by flaccidsteele » Wed Nov 13, 2019 3:52 pm

OP feel free to send me a PM

I'm of similar age and have a few more US properties than yourself but the idea remains the same

The Boglehead community won't have the answers that you're looking for. They just want a 3 fund portfolio and believe that real estate requires a lot of mental, emotional, and physical energy, but it does not, but how would they even know? I don't even live in the US

You are correct. Over the last decade, equity has more than quadrupled and rents have ballooned so it's natural to think about what to do next

Wricha
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Re: Should I do a cash out refinance?

Post by Wricha » Wed Nov 13, 2019 4:28 pm

OP, when did you last finance the buildings? Seems to me you could refinance with similar terms and be fine. If you have just bought the buildings then I would say due diligence was overlooked.

Grt2bOutdoors
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Re: Should I do a cash out refinance?

Post by Grt2bOutdoors » Wed Nov 13, 2019 5:49 pm

Watty wrote:
Wed Nov 13, 2019 8:52 am
dmk395 wrote:
Wed Nov 13, 2019 7:12 am
Refinance would be 4.75% on 150k.
That is a terrible rate if that is your primary residence, I am seeing places like Penfed with rates in the mid 3% range.

https://www.penfed.org/mortgage-center/ ... g-mortgage

What are the closing costs?

You really need to shop around.
It's not his primary residence, the rate shown above is on his rental property. The OP wants to refinance the mortgage on his rental to take cash out, the cash would then be used to make property repairs/upgrades.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Topic Author
dmk395
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Re: Should I do a cash out refinance?

Post by dmk395 » Wed Nov 13, 2019 8:32 pm

These are investment properties bought 15-20 years ago....

michaeljc70
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Re: Should I do a cash out refinance?

Post by michaeljc70 » Thu Nov 14, 2019 9:14 am

I don't see a problem with the refinance, especially given how low rates are. I would just make sure you take enough out so that you don't have to do this again in a couple years. You are either paying fees or a higher rate (if they roll them in) on each refinance.

DVMResident
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Re: Should I do a cash out refinance?

Post by DVMResident » Thu Nov 14, 2019 9:54 am

Grt2bOutdoors wrote:
Wed Nov 13, 2019 5:49 pm
Watty wrote:
Wed Nov 13, 2019 8:52 am
dmk395 wrote:
Wed Nov 13, 2019 7:12 am
Refinance would be 4.75% on 150k.
That is a terrible rate if that is your primary residence, I am seeing places like Penfed with rates in the mid 3% range.

https://www.penfed.org/mortgage-center/ ... g-mortgage

What are the closing costs?

You really need to shop around.
It's not his primary residence, the rate shown above is on his rental property. The OP wants to refinance the mortgage on his rental to take cash out, the cash would then be used to make property repairs/upgrades.
Worth noting the interest is fully deductible on rentals, which will in effect reduce the rate (maybe 3.325% effective rate at a 30% margin). Also, dumping the cash-out funds back into deductible repairs/depreciable improvements, further sweeting the tax incentives to do this (recapture taxes notwithstanding).

A cash-out refi sounds reasonable to me.

Obliviously, OP, you should do your own math with tax impacts includes and loan fees to find the break even points.

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