Vegas baby! I avoid gambling in risky investments outside of my control, but have you ever played blackjack?
The thrill when you push all your chips in and get an 11 against the dealer’s 7. You gotta double down!
When you double down, you are betting more of your own money – it would be so much better if your chips just multiplied on their own. Or split like a cell and all of a sudden you had two identical copies. [Mitosis for you science nerds out there]
Did you know rental properties can clone themselves?
Silently Building Equity
For four and a half years I have been cashing rent checks and paying expenses for my Atlanta property. Well, I guess my property manager does most the work – but I read the reports and keep an eye on things!
I’m definitely aware of the cash added to my bank account every month, as well as the tax benefits at the end of the year. Combined they are a cool $7,627 – averaging $1,700 a year from this one property.
This whole time equity has been secretly building without any effort required! Most investors don’t realize the 5 Components of Rental Property Return.
Every year the tenant has been slowly paying down the mortgage for me (1.5% to 2% a year in the first several years of a 30 year mortgage). And the property has appreciated 30% (better than the expected 15%, pretty much due to lucky timing).
When I purchased the property I only had 20% equity. Fast forward four and a half years and I now have 42% equity.
Put Your Money to Work
If you haven’t noticed yet, the focus of this entire website is how to make your money work for you. Passive income. Rental properties.
Equity is a nice cushion, but it doesn’t earn any additional money. Whether my equity is 20% or 75%, the rent is still the same. The expenses are pretty much the same.
There is something we can do to put that equity to work…
The Cash Out Refinance
You can refinance an investment property up to 75% of the loan value. Basically trading that equity for cash.
That cash is not taxed – it’s already your money, you are just accessing it.
Doubling Down – When A Rental Property Clones Itself
You can take that lump sum of cash and plow it directly into another investment property. You still own the original and will now have another that is producing cash flow, tax benefits, and building equity. Double your pleasure, double your fun!
Pay attention, this is where the compound returns come in. My rental property 1 will clone itself and purchase rental property 3. It won’t require me to save another $20k for a down payment.
Can you imagine if every property cloned itself after 5 to 8 years? Boom!
Yes, of course. Most obvious – you have to pay to do it. In my case, the estimate is $3,200.
You will also have a larger loan, likely with a larger payment depending on the interest rates. If you are at a point where you have enough loans and want to start paying them down, a cash out refinance might not be right for you.
You are resetting the 30 year repayment schedule, so if you want to live off the cash flow of your rentals soon, a cash out refinance might not be right for you.
If you are young and still building up your portfolio, go for it!
A Closer Look at My Decision
Let’s examine the details and see if it makes sense for me to do right now.
The current mortgage is at 5.5% and has a balance of $60,655. The monthly payments of principle and interest are $370.
The new mortgage would be at 4.625%. If the property appraises at $105k, the mortgage will be for $78,750 with monthly payments of principle and interest of $405.
Thanks to the interest rate going down, the increase in monthly payments is just $35. It will hurt the cash flow numbers for this property, but the gains in cash flow from a new property will be at least $150 a month.
So it makes sense from a straight cash flow perspective. When you look at the other components of rental property return (appreciation, paying down mortgage, taxes) it becomes a home run.
Feels a Little Tight Though…
Refinancing this loan would be a gain of $18,200. But it will also cost $3,200 to do. So the net is $15k that I can use to purchase another property. I would have to contribute another $6-8k to get a property in my preferred price range.
This is also largely dependent upon the appraisal of the property. If it appraises at $98k I will only pocket $13k. If it appraises at $113k I will pocket $17k.
At what appraisal number does this no longer make sense?
Now or Later?
- Double down sooner to have twice as many properties providing cash flow and building equity
- Lock in the low interest rate now in case things change (unlikely, but even a .1% change is $5 more a month)
- Let the property build more equity so when I take it out, the fee isn’t as significant a portion
What do you think, what should I do?
Photo: Images Money