Cash out refinance on rental property - Posted by Linda P

Posted by Linda on July 31, 2003 at 11:17:04:

Hi Peter,
Thank you so much for your detailed answer. I went through your reply three times to make sure i understand everything.
I have one more question if you don’t mind, how do you calculate the % of cash flow? You said that I will need to calculate it to make sure it is better than my mortgage rate. Do I also need to take into consideration the lost cash flow % on the existing rental condo?

This is what I want to use the 140K:
Purchase another similar rental condo for 300K, 20%down, rental value about 1800/month.
For the remaining 80K left, maybe find another similar property.


Cash out refinance on rental property - Posted by Linda P

Posted by Linda P on July 30, 2003 at 10:51:27:

Hello everyone,
I’ve done some search at this forum, but coudln’t find an answer that match my question.
Here is my situation:
I have a two br condo in a good area in NY
Rent is 1800/month
purchase price 5 yrs ago was 160K, now similar place go for 280K
Mortgage is 15 yrs with 7%, 10 yrs/50K principle balance remaining
I would like to get some cash out so I can purchase other rental condo, or maybe for myself
My questions are:
Which lender will you recommend that will do cash-out refinance on rental property? and is this in the form of home equity or a first mortgage.
What do I need to watch out for? additional cost? higher rate? Any other thoughts and suggestion.
Thank you all very much,

Re: Cash out refinance on rental property - Posted by Peggy Shuen

Posted by Peggy Shuen on September 07, 2003 at 08:54:05:

I have done a refinance with countrywide, they have a
program— as long as the loan amount is 50% or less
of the appraisal, they don’t consider it as rental property. I got a lone for 5 year fix/ adjustable at 5.375% last December

Re: Cash out refinance on rental property - Posted by PeterN

Posted by PeterN on July 30, 2003 at 20:40:10:

7%, 15 years is a pretty good rate. You could get a higher interest second, but the interest rate would be much too high. A cleaner way to do this is to redo the first mortgage. Since it is non-owner occupied, you can pull out up to 70 % of the appraised value. In your case, 196K. You should try to get a fixed 30 year loan or you may consider an ARM or option ARM. If the interest rate is less than 7%, I probably would go with the fixed if I can sustain positive cash flow.

Remember that your existing cash flow will decline a bit. Get out your financial calculator. Also, you will consume some of the 146K in equity in transaction fees, title charges, loan fees, etc. You will comfortably have 140K or more to invest. However, your rate of return on the borrowed funds should exceed that of the costs to borrow it. If your mortgage is 7%, then it makes no sense to buy a building with a cash flow of less than 7 %. I would target 20 - 25% for it to make sense to you.

I have refinanced my buildings many times to buy other buildings. (I now own 7 properties). Down the road, if you want to sell a building and do a 1031 exchange, you will probably have to wait a few years to build up your equity to a point where you can purchase a property of greater value.

If you feel the market has topped out, you may want to consider selling on a tax deferred basis. If there is more strong growth potential, then refi and buy another property with strong cash flow and appreciation potential. When you look for properties, sometimes you can find rental bargains with owners who rent substantially undermarket. You can then buy it and raise the rents to achieve your desired cash flow target. I once bought a 4 unit building and was able to raise the rents $1000 within one year! Two tenants stayed and two tenants moved. I promised them I would repaint and recarpet.

Re: Cash out refinance on rental property - Posted by Ling

Posted by Ling on September 08, 2003 at 15:58:33:

Hi Peggy,
Thanks for your message.
Do you know if they can do a longer term? like 15 or 30 year?
and can you tell me what does fix/adjustable means?
Thank you.