Interest rates are on the rise… so it’s the perfect time to refinance… right?
Well, it actually is! There are so many factors that need to be measured before refinancing, and interest rates are only part of it. The most important thing we’re trying to accomplish with a cash-out refinance is to extract some of the newly created equity from our forced appreciation business plan that we’ve executed.
So how do we do that? And why is NOW the right time, with interest rates on the rise?
Find out on this week’s episode of Multifamily Investing Made Simple, In Under 10 Minutes
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Tweetable Quotes:
“I can’t tell you how good it feels to take about two twoish million dollars of debt off of the balance sheet.” -Anthony Vicino
“That’s the big one for me, is really maximizing the return on equity, because if you take an asset and you increase it by 50 to 60% in value, you’ve got a lot more equity.” – Dan Krueger
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** Transcripts
refi
[00:00:00] Dan’: Hello,
[00:00:14] Anthony: uh, welcome to the podcast, new intro. Uh, Dan? Yes.
[00:00:20] Dan’: Good to have you here. It’s good to be here. It’s earlier. I, so I did an early episode. He came in all jazzed up and hyper and I feel like you’re a little bit more levelheaded, so this should be a normal episode, right?
[00:00:33] Anthony: Maybe. Uh, last time I came in, I didn’t have my mocha.
I had to substitute a monster. . Oh, did it? And that’s a different energy. Today I got my mocha. It hasn’t quite hit me yet. And this is still before 10:00 AM ish. Maybe it’s close to 10:00 AM now. I think it’s after 10. We took
[00:00:49] Dan’: a long time to get in here. Yeah.
[00:00:50] Anthony: Yeah. Sometimes it takes some prep, uh, . But, um, I don’t feel ready to speak to humans yet, so, But here we are making podcast [00:01:00] magic listeners.
What are we gonna talk about?
[00:01:03] Dan’: I, well, I mean, I’m pretty excited we got some new tech in here, so don’t
[00:01:07] Anthony: even. , you’re gonna want to go maybe to the YouTube channel to multifamily investing made simple. We’ll put a short video there. You can see how cool the studio is now. Um, we added some voice activated
[00:01:18] Dan’: shenanigans cause you used to have to flip five to eight switches.
Two, three to turn all this on. 4, 5, 7. This thing a lot. Yeah, there’s a lot now. We just say something to Google. Hopefully I don’t
[00:01:35] Anthony: trigger Don’t, don’t even say, we’re not even allowed to say that word anymore in this office because just start turning on and off. She just starts listening. Yeah. But yeah, it’s pretty awesome.
Um, pretty neat feature. All things told. Makes it a lot easier to come in here and just start recording. So let’s, let’s record something. Let’s do it. Let’s do it right now. Um, we’re here. I want to talk about. The fact that interest rates are ballooning, they’re getting crazy, and despite that, we [00:02:00] are in the midst of refinancing a property.
So why on earth are we refinancing into a rising interest rate environment? That sounds like the absolute wrong thing to do.
[00:02:09] Dan’: Sounds reckless, reckless, Complete disregard for economics.
[00:02:13] Anthony: I’ll be honest, I, I feel reckless, right? ,
[00:02:18] Dan’: you don’t look reckless. We’ll see what happens when their coffee kicks.
[00:02:22] Anthony: That’s the thing’s gonna change.
[00:02:23] Dan’: Yeah, no, we get this question a lot. Um, and you know, a lot of, a lot of newer investors are coming in with the context of, um, you know, their experience with, with mortgages and, and, and debt on property is their primary residents. Typically, when the average consumer who owns a home. Does a refinance, It’s to get better rates, not higher interest.
They don’t want to go from, say, I think we were at like a 3.85, up to like a 4.6. Most people are like, Why would you wanna do that? That sounds worse. That’s just gonna cost me money. Yeah, it’s a good question.
[00:02:55] Anthony: Yeah, it’s a good question. I mean, there’s a lot of reasons why, um, [00:03:00] one thing that comes to mind is there’s a lot of equity b baked into the building.
Mm-hmm. . So we bought this thing in 2020. And I, I, I don’t want to talk about like specific numbers, but there’s a good chance it’ll refine and return around 50% of initial invested capital. So that means there’s a lot of equity sitting in this building that if we did not refinance, we can’t tap into mm-hmm.
So that’s one is like being able to return capital earlier to investors is great because then they can go and invest at money and it can start earning a yield. So that’s one thing. Mm-hmm. . Yeah.
[00:03:31] Dan’: Yeah. Um, yeah, there’s, I mean, there’s a lot of reasons. That’s the big one for me, is really maximizing the return on equity, because if you take an asset and you increase it by 50 to 60% in value, you’ve got a lot more equity.
And let’s say before you were earning like a hundred thousand dollars a year on a million dollars of equity, that’s about a 10% return on your, on your equity, return on equity. Now, if you double the value of your building or the, the, the value of your [00:04:00] equity doubles up to 2 million and you’re still making a hundred thousand dollars a year in cash flow, that’s still good cash flow.
that’s like 5%. Mm-hmm. , right? So the return on equity starts to drop. It’s not the most efficient use of capital. And when you refi and pull cash out, that’s a non-taxable event. So lets you reap some of those, take some of those profits out non-tax, and then reallocate those to something that you can get even more yield on.
[00:04:22] Anthony: So now the big, the big question that people will ask is, Well, you’re putting all this new debt on there before there is all this equity in there. So your loan to value is nice and low, big safety margin. Now you’re gonna put all this debt back on it, probably up to 75% loan to value. And with the higher interest rates, that’s gonna into your cash flow.
Like are we are what? What? You’re crazy,
[00:04:42] Dan’: crazy reckless. Yeah. Well, we’re not on this one. We’re not maxing out the leverage. So we always go into properties, I shouldn’t say always, but 90% of the time we’re going in with a 75% loan. And then we start increasing that equity pretty much from day one. Um, so we’re never really over 75% and this time we’re getting about 68% leverage, so we’re not really [00:05:00] maxing that out.
Um, but uh, but honestly on this one, our debt service is gonna be about the same as it’s always been. So cash flow is gonna be relatively. Not impacted. Wait, wait,
[00:05:12] Anthony: wait. So we’re gonna get higher interest rate, but the, the debt service coverage ratio is about the same. How’s that work? How is that possible?
[00:05:18] Dan’: Yeah, so you probably ask it. Okay. How do you take on more debt at a higher interest rate and have your mortgage, uh, your, your debt service be the same as it was before? Well, we get interest only with this, so we’re going from a local, regional bank, uh, which was great for getting into the. Uh, to Freddie Max agency debt.
So we get a lot more, um, attractive terms, you know, outside of the interest rate. It’s, it’s still good relative to where rates are at today, but there’s a lot of other factors that come into play here. Like it’s non-recourse. We get longer amortization, so 25 years, it’s
[00:05:47] Anthony: 30 years. I can’t tell you how good it feels to take about two twoish million dollars of debt off of the balance sheet of, uh, recourse.
So, uh, yes. Hey, hey, we should do a video. We should do a video about like how we. [00:06:00] What took 2 million of debt off of our, or I don’t even know how to word it, but that’d be interesting. Yeah. How to, We
[00:06:06] Dan’: took, we took some personal guarantees off the table. Yeah. Which is nice because that’s, I mean, as general partners, that’s a big, uh, you know, risk that we take big and the, of how much money we put in.
Uh, our personal assets are always at risk when we go into these deals. You know, our investors don’t have the bear that risk, so it’s a great deal for them. But, you know, we sign personal guarantees on a lot of properties mm-hmm. , so it’s nice to have to, Nice to be able to start to carve some of those off.
Yeah. And,
[00:06:30] Anthony: and I think at the end of the day, like the really big thing here is when we can do a refinance into an environment like this where. . Yeah. The interest rate isn’t as great as it could have been if we had done this a year or two ago. Right. But if the, That debt service coverage ratio is still effectively same, the cash flow that we’re gonna be looking at coming on the back end of this deal’s about the same, well now we’re just de-risking the investment by reducing how much capital is tied up into the building.
So as an investor, if you’d put a hundred thousand dollars into it and you’re gonna get 50,000 back, like you just have $50,000 less at [00:07:00] risk still in the building, and you can do something else with that 50, you could. I don’t know, buy into the stock market at it’s crazy lows right now. You could go buy another building, you could go on vacation.
So all in all, for us, like it’s always about, there’s so many different variables to consider it. It refinance is never just a, a pure green light red light, like really clear, uh, obvious decision. There’s a lot of balancing. And in this one, , um, skews very positive despite the higher
[00:07:28] Dan’: interest rate. Yeah, yeah, no, that’s a good point too.
I mean, you know, a few years we might do another one, and then our investors will ha effectively have $0 still at risk from their original investment. They’ll still own the same amount of equity. But all the money they initially put in’s already been brought back to ’em. So, yeah. So
[00:07:43] Anthony: if you’re, if you’re sitting at home and you’re thinking about doing a refinance, maybe on a building that you personally own or that you have investors in and you’re like, How do we know, like when’s the right moment to do it?
Like, just do the calculations and then look at like what’s your buffer on the back end? And that’s the really important thing is like interest rates, they, they [00:08:00] eat into your buffer in a lot of cases cuz it can reduce the cash flow because that’s, you know, your debt service coverage can be, Depleted. But if it’s not for, you know, reasons of having like an interest only period that lasts for a really long time, um, then maybe the decision actually does make sense.
So hopefully this gave you a couple. avenues of, of to consider. So food for thought.
[00:08:22] Dan’: Mm.
[00:08:23] Anthony: I’m sorry for that noise. I know some people really hate the sound of like, Oh, listeners are
[00:08:26] Dan’: tuning out now. . Well, we, Well, it’s pretty much over, so that’s fine.
[00:08:31] Anthony: The pain, the suffering has come to a conclusion. , we appreciate the heck out of all of you, except for you,
[00:08:37] Dan’: Louis.
That’s my dog. He doesn’t
[00:08:40] Anthony: listen to this. Oh man. I’ve pulled a name at random thinking. Surely nobody is named Louie . Yeah. Yeah. Your dog is named Louis. There’s a Louie out there. I am so sorry. I didn’t really mean it. I love you the most, Just everybody else. Second best. Oh, okay. Yeah. Now I’ve gone him from offending like a small minority to the everybody.
This is Spiraly. Not [00:09:00] let, let’s just get outta here. We’ll, got, we’ll see in. Well, in the next episode, that’s a stroke, Sorry,
[00:09:04] Dan’: scene.
