Tuesday, August 17, 2004

Increasing my cashflow

After about a year of renting and getting around $150 a month, I decided I wanted to try to increase that. (I got a cell phone and the bill was $90 a month, so that ate up most of the cashflow.)

Interest rates had continued to fall since my original mortgage was opened and I had finally overcome my fear of adjustable rate mortgages. I think I overcame this just from being more and more immersed in real estate, as well as having a clearer understanding of my goals. When I first bought the property, I had envisioned holding on to it forever, renting it out again and again. Considering I rented it on a lease option, this was an interesting view, since any tenant could buy it. (With lease options though, the vast majority don't buy.) Anyway, I had come to the realization that I would probably sell the house in 5 to 10 years and then buy another property or two. Given that, it really made no sense for me to have a 30 year mortgage.

Remember what I said earlier - 30 year fixed mortgages are the most expensive mortgages you can get. So when I called a mortgage broker to refinance, I looked at all options. I wanted to go with an interest only mortgage, but I wasn't quite at 80% loan-to-value yet, so those were out. I decided to go with a 5/1 adjustable 25 year loan. The interest rate was fixed for the first 5 years, then could adjust once each year after that. Since I planned on selling the property in a couple of years, I'd be done with the loan before it ever adjusted.

As with my last refinance (from a hard money lender loan to a bank loan), I rolled the costs of the refinance into the loan. This increased my loan balanced by about another $3,000, but my monthly payments still dropped. I would be getting about $260 a month cashflow with this new loan and my tenant would be paying down the higher principle, not me.

As part of the refinance, I discovered some interesting things about my tenant and my real estate agent. A new appraisal was needed by the bank, and the appraisers access to the property had to be coordinated with the tenant. Apparently, the tenant thought I was selling the house to someone else and it took several phones calls from both his agent and mine to assure him that wasn't happening. This gave me an idea of the lack of experience in real estate my tenant had.

My agent, on the other hand, was putting up what in retrospect, I can see were little warnings signs. (See my post Identifying People's Mindsets for more on this.) The appraiser had a bit of a problem because my property was still listed in the MLS. Since the sale had not actually taken place yet, my agent had left it in there. The appraiser couldn't, in good faith, not tell the bank that it looked like I was going to sell the house right away, which of course, would cause the bank to turn down the loan. So what we ended up doing was taking the house out of the MLS for about 2 weeks. Technically, I think it was put on a "not available" status. In order to do this, my agent had me sign some paperwork stating that she was still my Realtor and that I would "re-list" with her, blah blah blah. Why should I have seen this as a warning sign? Because it showed she was more focused on ensuring she got her commission than working to help me. Now we still had all our signed paperwork for the sale - the property was in escrow, don't forget, and those documents showed she would get a commission, but she still had me sign all this other stuff. As I said, it's interesting to see where people's minds are at.

Anyway, after the refinance, I had to contact the escrow company and give them the new mortgage payment info and then it was done! I had increased my cashflow about $100 a month to around $260. Piece of cake.


reicurious said...

Hello Shaun,

Great posts. I am curious who you did the refinance from hard money to a regular loan with and the account servicing. I heard most lenders want you to have owned the properties for year before they refinance a rental property.


Shaun said...

The refinance was done by Wells Fargo. I went through a mortgage broker and he located them. The account servicing for rent collection and such was done by my title company, Stewart Title.

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