At what percentage should you pull equity out of your properties to reinvest?

[KGuthro]

I have a scenario and I would love to hear what people think. Here is my situation.



I own a townhouse in Hamilton, ON Purchased 2011 for $248,00 great tenants for the entire 3 years. Mortgage is $191,000 Property is worth $320,000 based on comps in the area. I was thinking of re financing up to %75 ($240,000) which would allow me to take out approx $49,000. I would keep my monthly mortgage payments around the same as I increase my amortization from 25 to 30 years and my cash flow would be about the same at $350/month. I would need approx $65,000-$75,000 to close another property. So my question is should I pull the equity out now and use some additional savings funds to purchase another property or wait, build some more equity to refinance? What is general rule of thumb when it comes to refinance? The market is doing very well in Hamilton right now but don't want to over leveraged if it starts to head south. Appreciate any feedback.



Kyle

 

[Matt Crowley]

Hi Kyle,



I think you have a good plan there. As far as I know, there is no rule of thumb.



As far as leverage for your portfolio, since your mortgage payments are going to be exactly the same you are in a fairly equivalent cash flow scenario as before. My analysis of leverage would start by looking at the physical asset you currently have and are looking at acquiring.



How many bathrooms do your competitors have? Garage? Finishings? Dishwasher? Location?



Since it is a townhouse, the danger is it is 100% rented or 100% vacant...in a down market, it is its competitive features that will differentiate it from the crowd. That is how I would access leverage here.

 

[Thomas Beyer]

It depends on your goals, but assuming you wish to buy more assets and grow your real estate portfolio it makes sense to max out the equity takeout (i.e. 80% not 75%) and buy more assets. This assumes of course the additional mortgage can be serviced comfortably by the existing asset and the value is at least flat looking forward.



The you can make more money on two assets than with one, as two tenant now pay down 2 mortgages and you will create equity upside on two assets, not just one (assuming a flat to slightly rising property market)



An interim step is to get a two-tiered equity plus LOC against the property. I.e. the the mortgage in place, but add a line of credit (LOC). Leave the LOC low to 0 until you need it. The issue is that often the existing mortgage plus LOC is often less than 75-80% of the possible mortgage refi amount.



To grow a real estate real estate portfolio you need more cash. Cash comes from two sources: your own or from third parties (i.e. JV partners and lenders/banks).



You continue the path of buy cheap, improve, manage impeccably, re-fi, buy more, sell/prune occasionally until you have achieved your goals.

 

[KGuthro]

Thank you Thomas and Matt for your feedback. My properties contain very smart upgrades and are maintained very well and think that will be my advantage if the market turns. I would refinance up to 80% but the mortgage brokers said I would need CMHC insurance which would be quite costly.

 

[Thomas Beyer]

[quote user=KGuthro]I would refinance up to 80% but the mortgage brokers said I would need CMHC insurance


Why is that ? Most banks do not require CMHC for 80% LTV.

 

[KGuthro]

Thomas, I was confused by this too. The refinance was through TD and they required CMHC for 80% but 75% was perfectly OK. I will try and find out and report back

 

[Thomas Beyer]

The golden rule: He who has the gold makes the rules.



Less risk for banks, in fact no risk, to get a CMHC insured mortgage.



Ideally you go through a mortgage broker for a new mortgage so they can shop around on your behalf and get you the best rate.