Refinance or put your own money down.

[Pooja]

I am in the process of getting my third investment property (both were done long time back with no understanding of market factors) .
Property 1 is paid off in Mississauga (GTA) and if nothing taken out will provide a positive cash flow of $1000 . Current property value exceeds 490,000 .My question is which scenario out the two is more favorable for in buying the third one, looking at the current market situation in Greater Toronto area .

Scenario 1 Refinance and get 20 % from the one in Mississauga and let the positive cash flow go towards the refinance payment.
Scenario 2 Use my own money from my other business corporation to pay for downpayment
Looking for different viewpoints and pros/cons on th

 

[Thomas Beyer]

Why not buy 2 more ?

Look at after-tax ROI of your investment, i.e. what ROI, going forward does your current investment deliver. "After tax" means both "as if sold" as well as "net return on cash flows". Example:

Asset is worth $500,000, mortgage is $200,0000, and capital gains taxes and realtor fees (as if sold) are $70,000. So net equity is $230,000. ROI going forward, assuming 2% annual value upside ($10,000) plus cash-flow ($10,000) plus mortgage paydown ($5000) is $25,000 thus a roughly 11% ROI. Assume now you increase mortgage to $300,000 (and invest it elsewhere at 12%) your ROI on this asset now is roughly $25,000/$130,000 or almost 20% ! [ I assume now slightly lower cash flow but offset by slightly higher mortgage paydown on a higher mortgage ]

Missing in this example is the existing mortgage level.

Generally speaking, in a 2% or so mortgage environment is makes sense to borrow at 2-2.5% and invest it at 5-7% !

And, if you have add'l cash, do both. It makes no sense in my opinion to pay down your mortgage too fast in the current 2% (heading sub 2% anyway) interest environment. Increase your asset base instead, keeping in mind diversification, reserves, cash-flow and amount of time it takes to manage.

Switching asset classes, say to apartment buildings, mobile home parks, retail malls, office towers or light industrial warehouses should be considered at some point, as you not only lever cash, but also time.

 

[Rickson9]

$1000 cash flow on $490k? Unless I'm missing something, this sounds terrible.

 

[Thomas Beyer]

$1000 cash flow on $490k? Unless I'm missing something, this sounds terrible.

Assuming it is monthly, this sounds decent to me.

 

[Pooja]

$1000 cash flow on $490k? Unless I'm missing something, this sounds terrible.

The 1000 positive cash flow is monthly after paying everything .Also the 490000 is not the purchase price .The property was purchased at 210000.If I get it reappraised ,that's what the approx market value is now.

 

[Pooja]

Why not buy 2 more ?

Look at after-tax ROI of your investment, i.e. what ROI, going forward does your current investment deliver. "After tax" means both "as if sold" as well as "net return on cash flows". Example:

Asset is worth $500,000, mortgage is $200,0000, and capital gains taxes and realtor fees (as if sold) are $70,000. So net equity is $230,000. ROI going forward, assuming 2% annual value upside ($10,000) plus cash-flow ($10,000) plus mortgage paydown ($5000) is $25,000 thus a roughly 11% ROI. Assume now you increase mortgage to $300,000 (and invest it elsewhere at 12%) your ROI on this asset now is roughly $25,000/$130,000 or almost 20% ! [ I assume now slightly lower cash flow but offset by slightly higher mortgage paydown on a higher mortgage ]

Missing in this example is the existing mortgage level.

Generally speaking, in a 2% or so mortgage environment is makes sense to borrow at 2-2.5% and invest it at 5-7% !

And, if you have add'l cash, do both. It makes no sense in my opinion to pay down your mortgage too fast in the current 2% (heading sub 2% anyway) interest environment. Increase your asset base instead, keeping in mind diversification, reserves, cash-flow and amount of time it takes to manage.

Switching asset classes, say to apartment buildings, mobile home parks, retail malls, office towers or light industrial warehouses should be considered at some point, as you not only lever cash, but also time.

Thanks for a different perspective Thomas.The idea is to go for more properties as we proceed but for this one I am not sure if it's better to go for refinancing or put your own money down
.Considering the Mississauga property is very easy to rent .
What makes more sense to tenant pay the downpmt in course of time or use our own money which is accessible at no interest .

 

[Thomas Beyer]

What makes more sense to tenant pay the downpmt in course of time or use our own money which is accessible at no interest .

"no interest" also means "lost opportunity cost".

Money has no value, besides for investment or for life's pleasures. Investment can be for monetary gains, education or society's needs ( aka charity or donations ).

Personally I'd refinance and create an even bigger cash buffer. With more cash available you will notice more opportunities.

 

[Matt Crowley]

Property 1 is paid off in Mississauga (GTA) and if nothing taken out will provide a positive cash flow of $1000 .

I second @Rickson9.

NOI = $1000 per month and property value is $490,000, that is a 2.5% yield. Pretty bad.

With DCR maximum of 1.2, your maximum cash out with refinancing is ~$185,000. Meaning, you can only take on about $833 of monthly debt with a property that performs this poorly. (Take your NOI of $1000 / month and divide by 1.2)

Definitely take a look at after tax returns.

 

[Thomas Beyer]

I second @Rickson9.

NOI = $1000 per month and property value is $490,000, that is a 2.5% yield. Pretty bad.

With DCR maximum of 1.2, your maximum cash out with refinancing is ~$185,000. Meaning, you can only take on about $833 of monthly debt with a property that performs this poorly. (Take your NOI of $1000 / month and divide by 1.2)

Definitely take a look at after tax returns.

Seriously guys ?

You can do better than that !

Cash flow is of course after mortgage payments !

NOI would be far higher than that.

 

[Tina Myrvang]

Assuming it is monthly, this sounds decent to me.

Me too.

 

[Pooja]

I wrote this post to get a simple answer ....Well I got 2 conclusions from my post ,I have lots to learn .
I also concluded that there is no right or wrong answer to one question .But indeed thanks to all who pour in different perspectives .

 

[adriano]

One thing that I think you are missing is. It's all your money whether you re finance or you use money you have. I agree with Thomas, buy more than one property. I think money sitting in the bank is doing nothing for you. Just my thoughts

 

[DonCampbell]

Given your situation (and learning curve):

You may find this article helpful as well:

Sell or Refinance? The Agony and the Ecstasy http://blog.reincanada.com/sell-or-refinance-the-agony-and-the-ecstasy

 

[REInvestors888]

We have a slogan that we follow when we face dilemma of this nature "Don't kill the goose that lays golden eggs".

Use OPM instead and keep excellent cash flowing assets in your portfolio as long as possible.

The article by Thomas touched me a lot because up until now, we hardly overcome the emotional pain we endured when we sold a prime residential house in Toronto's hot market. We were rookies at the time and since learned real estate investment the hard way.

 

[Cory Sperle]

It is sometimes a good idea to renew instead of refinance, and leave some equity there for a rainy day. Just because you can refinance and max out your LTV doesn't mean you should

 

[REInvestors888]

Excellent feedback, Cory.

IMO: I would only renew or refinance and take out equity (not my own money, of course!) to buy another rental property as Pooia was trying to decide on. But, to take out equity and not investing it, I would ask myself serious questions million times over.

Thanks REINation I got this OPM idea from all of you===)))

 

[Thomas Beyer]

Refinance at low 2% is the cheapest money you can get and THE path for wealth creation if you are able to invest it at 5-8% (or far more) .. cheaper than any JV where you give up 50%+ of equity. Think of money at low 2% as essentially free money (ie close to inflation) as a gift.