Chapter 15: “Refinancing All Cash Deals”
(Turn Your “Trophy Equity” into Something Useful.)
By getting into a position where you are dealing with cash or some other type of self- funding solutions gives you the flexibility to do some really great things. As you may have noticed, we have been talking about using a leverage position to get us into a place where we can use our cash position to our advantage. One of the best ways we can do this is by taking a house with 100% equity, our previously discussed trophy equity, and using it to our advantage by refinancing part of the equity out in the form of a tax neutral income. This includes the option of making your own note for refinancing discussed in the previous chapter. Since the cash we get out is in the form of a loan that is paid off for us by our tenant thank-you very much, it isn’t taxable income. So, this means we can use the cash profits from the flips to buy and rehab a house, then get it right back tax neutral to use as we please. We’ve discussed some of these options in a previous chapter. Please make sure your tax professionals walk you through this so you don’t miss anything, or do anything illegal.
Let’s walk through an example of how we might use this strategy. First, let’s assume we have a house we bought and rehabbed for $35,000. This number includes all fees and expenses associated with this property. The sales comps dictate an appraised value of $70,000. We will be renting this property for $950/month and have tax and insurance payments coming to $250/month so we will have positive cash flow of $700/month.
Let’s say we want to get our expenses ($35,000) back out to use again on the next house. The resulting loan would be a loan for 50% LTV…$70k divided by $35k. The resulting refinanced loan should have pretty nice terms with that low of an LTV. I just ran this by my funding source for this, and I was told at this time I can get an interest rate on a 30 year amortized loan of 4.25%. This would make my monthly payment $172.18 (we’ll use $175/month for this example). If you subtract this from the cash flow we have now without debt service, we get a new cash flow of $525/month. Pretty good eh? We get a cash flow of $525/month, $35,000 in tax neutral cash, and we still have $35,000 in trophy equity yet to be tapped. It will take 30 years to pay this loan back, so we would need to wait that long to get access to this money again. We could always refinance again before then to get better terms or to access the rest of the equity, but it will take 30 years to access this part of the equity again unless, we change up the original terms of the refinanced loan.
What if we changed to number of years we amortize the loan from 30 to 10? That would increase the monthly payment, but we would also pay off the loan much faster and then be able to access that part of that equity again much sooner. Let’s see how this would change things. The new monthly payment, assuming the same interest rate (it should be lower though), would be $358.53 (we’ll use $360/month for this example). So, our new cash flow with this debt service would be $340/month. That’s still very good cash flow. It gets better……….Sorry, but you’ll need to read the book for more. The next part is based on parts before this chapter, so I chose to stop right here. You can take a look at the Table of Contents to see what else I discuss.