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.