Sam writes: 2 of my investment properties have 30 year fixed rates in the mid 2’s and low 3’s. At what LTV does it make sense to cash out refi with these higher interest rates?
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Welcome back to real investing. I’m Tim Herriage. Thank you for stopping back by today. Sam writes two of my investment properties have 30 year fixed rates in the mid twos and low threes. Oh, at what LTV does it make sense to cash out refi these higher interest rates? Oh man. You know, Sam, I was actually thinking about that this morning. Um, my wife and I refinanced most of our investment properties last year in the mid to low threes. And I was reading a friend of mine’s Facebook post that he had just captured some of his dead equity and was investing in multifamily. And I was really just contemplating the thought process of dead equity. Like, I mean, is equity really dead, um, because you are putting your cash, your equity into the deal. In theory, you’re refinancing most of it out. Then you have your unrealized equity and it’s that unrealized equity that I guess is producing the return on the investment.
It’s very, um, I think, I think it just has to do with what are you gonna do with the money? Right. So, I mean, we say these higher rates, but this week RCN capital are rates for 30 year fixed investment property loans got down, back down in the low sixes. Um, so if that’s in the low sixes, is that really low, uh, headline inflation’s 9%. So is that money cheaper than inflation? If you’re appreciating five or 10% a year still, is that a wash right? The, the cost of the debt. So I think for me, it comes down to, what am I gonna do with the money? Uh, am I just pulling the money out to pull the money out? If so then I would say no, don’t refinance, but if you’re going to borrow money at 6% and then go make 18% on that money, then the compound effect of that investment decision, I think makes a lot of sense.
So I, I, I, I try not to answer questions with questions, Sam, um, specifically on this show, but I think it all depends on what you’re going to do with the money. I think if you’re gonna make money, if you’re gonna invest it into flips or more rentals, if you feel like this is a temporary dip that you could go get a good deal or two, and your return’s gonna be higher than the cost of debt, then yes, I think it’s a great time too. Me personally, I try to keep the leverage on my properties, not maxed out, but topped out, which we’ll say, I think on my portfolio, we run around a 62 or 63% debt average. Um, and there are some that we are thinking about refinancing, but we, we rushed to the altar last year when rates were so low. So I think as long as you cash flow, the LTV is a nominal thing, right?
Because even if we do experience some value decreases in certain markets and submarkets that we’re seeing across the United States right now, I, I don’t think we see a real drop in rent. And if we don’t see a real drop in rent, then I think the cash flow, the debt service coverage ratio measure is more important than the LTV measure. Because if you get good fixed debt, you don’t really have to worry about the loan to value until you go to sell. And if you’re planning on holding for five to 20 years, then I don’t think you really have to worry at all about the loan to value as long as it’s not on a line of credit or a warehouse facility where they could call the loan due or, uh, make you reduce principle, which the loans that we do at RCN capital don’t, we can’t do that.
So cuz they’re fixed they’re 30 year fixed. Um, so yeah, you know, I’m, I’m struggling with that myself. As I look at new acquisitions, I still feel like historically getting six in a quarter 30 year fixed money at 75 LTV was virtually unheard of five years ago. And now I, I said this at a mastermind last week. Um, the last couple years of financing has been like getting free crack and now you actually have to pay for your cocaine. Uh, it’s still a good drug. Um, and I don’t do drugs. Just it’s an analogy. Um, but too many people are hooked and on that crack and they’re missing the, uh, it it’s psychological, right? So I, I think it’s a good investment. As long as your cash flowing. As long as you’re cash flowing, you’re making a return. As long as you’re making a return, it’s higher than the cost of the debt than it was a wise decision.
So, um, hope that helps I say, go for it, bud. If you’ve got, um, a target investment property, uh, get that drop powder. And um, I think, I think the, uh, I keep saying, I think the market keeps going up. I think we’re in a temporary dip and I feel like rates peaked in June. So that’s all I have to say. I hope it was helpful. Sam, thank you so much for taking the time to ride in. If you’re listening and you have questions, don’t forget, hop over to, Ihavelunchmoney.com and submit your questions. We’ll see you tomorrow.
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