TBT: Ask Marco – Should I Refinance our Rental to Buy More Properties?

Hello my friends. Welcome back to Passive Real Estate Investing where we dive into the world of real estate investing among other related topics. To help you with your real estate investing journey, today we’re doing something a little different. We’re going to take a trip down memory lane and showcase an important episode from the past on what we call our throwback Thursday episode. Now, whether you’ve been with us since the beginning, which goes back to 2015, or you’re tuning in for the first time, this episode is a must listen, we are revisiting one of our more popular episodes from the past, and believe me, what we discussed back then, whether it’s six months ago or six years ago, is just as relevant today. So sit back, relax, and let’s rewind the clock for this great episode. Enjoy.

Today’s question comes from Jade. Thank you very much, Jade. She says, excellent podcast. I wish that I’d found it sooner. As you mentioned, ignorance is expensive. We paid off most of our rental home, but we’d like to retire soon, which means we need more cash flow. We’re considering refinancing the rental in order to fund the down payment of additional rental properties in a different state that have a better cash flow. Any thoughts on this? And Jay goes on to say we’re nearing retirement age, so the thought of a refinance with a 30-year mortgage seems like a long time, but it would give us the best cash flow. What are your thoughts on this? Any other things we might want to consider? So this is a great question, but there’s not enough information here to really give you a more specific or targeted answer, but I can answer it generally.

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And here’s what I would say. If you have a rental property right now that is mostly, if not entirely free and clear, so that means you have a mortgage on it but it is not paid off, that’s fine. But if you’ve got a lot of equity that you can pull out through a refinance, which is essentially a cash-out refinance and there’s no tax implication on that at the time than what you can do is you can take that equity and turn it into down payments on additional rental properties. And if you do the math, more often than not, what you will find is that the net income you have from that one rental property or rental property is typically increased sometimes considerably by taking the equity out and multiplying the number of properties you have from that one too. Let’s say three, four, potentially even five rental properties.

And so when you run the numbers, even though you now have increased debt service on that first rental and you now have debt service, meaning the mortgages on the additional rentals, you will find that if you add up your net cashflow from each of those rentals after paying all the expenses and after paying your debt service, that the aggregate total of those individual cash flows will be larger than what you have on that single rental. And this is a math question, all you have to do is just tick, sit down with a few assumptions, grab a pen pad and a calculator and just run those numbers. You could also go to our website and use our online tool. The cashflow analysis tool that’s really attached to every single property just changed the numbers and you can see for yourself how this will pan out for you.

And so the bottom line is that yes, more often than not you will get more cashflow and yes you will have these new mortgages, but this and generally speaking, that’s a great idea. Now to Segway to your second question about these 30-year mortgages seems like quote unquote a long time. Yes. If you’re amortizing them over 30 years, that is a long time, but you have to ask yourself the question, what is your longterm strategy? What? What is the intention of these properties? If in the near term you’ve increased your cash flow and that that’s good for you, it’s doing you benefit not harm, which it would of course. What is your strategy? Are you trying to pay off these properties as quickly as possible or are you essentially keeping them in your estate and you are going to pass them on or we’ll them to your, your kids or your family, whoever that may be.

So if it doesn’t impact you only benefits you now and in the near future and the 30-year mortgage is really a moot point because you’d never planned on selling these properties and paying them off now is really not going to change much materially then it’s irrelevant. You’re going to have financing on them. You have to remember that the financing allows you to multiply the number of properties you can have. It multiplies your income. And when you factor in equity growth over time, it actually accelerates your wealth creation. So I would bet nine times out of 10, if you have the right properties in the right market that this is going to benefit you. So keep that in mind and I don’t think I’m missing anything here, but, um, again, call one of our investment counselors and have them run through the scenario with you and we can talk about specific properties within specific markets and we can look at more specific numbers because this is not a complicated math questions, so it should be pretty easy to calculate and figure out.

Um, you do have one more question in your email, which I will touch on. You said also, what are your thoughts on multifamily properties such as a fourplex where one unit might be rented out as a short term lease or with Airbnb or home away? Well, you can do this with a single family home or a duplex or triplex or fourplex. So it’s really not so much, you know, the property type A, you could always do short term leases with Airbnb or um, uh, I forgot the other one is I think it’s Vbo something like that. So yeah, you could do that. And there are people who are specializing in the whole Airbnb space. And if you’re comfortable with short term rentals, meaning that they’re there for only one night, two nights, three nights, maybe a week, depending on the property and the location. Um, you know, it’s, it’s a way to actually increase your cashflow if done right, but you have to have the right location because if it’s not in demand by a lot of people who want to Airbnb to your property, then it may not be any more lucrative than having a longterm traditional tenant.

So, uh, I, that’s beyond the scope of this episode in this, but you know, you could do it. I mean, so your thoughts, my thoughts on, on your question are, it’s not a bad idea. I’m not going to say it’s a great idea, but if you’re in the right location, then it probably is a good idea. So you have to look at that first because location is so important when it comes to short term rentals. They’re just essentially guests like at a hotel. They are not people who live in the local area and work in the area and go to school in the area. That’s where your traditional tenant comes in and that’s why long term rentals have more stability. They are what they are. They’re tried and true, so that’s it. All right. Well Jade, I appreciate the question.

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