Property Management Blog

2017 – The Year to Recapitalize

KRS Holdings - Monday, January 2, 2017
Property Management Blog  

Invest Long Term Money to Finance Long Term Capital Expenditures

At Historically Low Interest Rates

At the beginning of each of the last two years, my crystal ball clearly and accurately predicted that … “There is nearly a perfect storm climate for rental property investors … one which may not prove repeatable for decades.” Two of the elements that make up this unique mix, particularly in the Greater Richmond and Tidewater regions, were low mortgage interest rates and the upward trending of rents.    As we enter 2017, I’m gazing into that same crystal ball and for nearly the same reasons as I urged investing in residential real estate in both 2015 and 2016 … I now predict that this year is ripe for existing investors to recapitalize their properties. Take advantage of low-interest rate, long term money to finance long term capital expenditures.   So the thrust of this article is not to just refinance to cash-out, but rather to free up equity to be reinvested in your residential real estate to enhance both current rents and longer term value of your asset.

Single Family Home Investment Property Let’s say you have a single family investment property in need of a new roof. Due to the stagnant real estate market of recent years, we’ll assume the original and current value to be $175,000 with an outstanding amount owed of $125,000 on the original loan. As the investor in a non-owner occupied home, you may qualify for a much lower interest rate than your current loan. Consider this scenario.   Original Mortgage Amount: $131,250 (75% Loan to Value) Type of Loan: 30 year, fixed rate Interest Rate: 5.0% Amount Owed: $125,000 Monthly Payment: $705   Refinance Amount: $131,250 Type of Loan: 30 year, fixed rate Interest Rate: 4.2% Amount Owed: $131,250 Monthly Payment: $642   Now, let’s say your property is in need of a new roof. In round numbers in central Virginia (depending on the type and size of home), you can anticipate a cost of about $6,000. That said, let’s take a look at the net result of recapitalizing your investment.  
  • New Loan of $131,250 with cash out of $6,250 pays for your new roof with a life expectancy of 20 to 25 years.
  • Your monthly payments are reduced by $63 every month ($705 minus $642)
  • Your new loan may increase your mortgage interest tax deduction.
  Contrast this with financing the cost of the new roof over a 3 to 5 year period. Depending on the lender, you would experience monthly payments in a range of $115 to $200 or more.   What’s not to like about recapitalizing?!   Of course, your circumstances will determine the relative benefits of recapitalizing. At the very least, it’s well worth your time to investigate your options and make an informed decision. Here are a couple of resources to help you in that quest.   http://www.amortization-calc.com/   https://www.freeandclear.com/interest-rates/non-owner-occupied

  Multi-family Properties Recapitalization presents an efficient way to invest in multi-family properties. While the magnitude is much greater, the basic principles remain the same as for single family homes.   Recapitalizing often results in the ability to update multi-family properties in some or all of the following ways:  
  • Painting the building(s)
  • Resurfacing parking lots
  • Installing new hardwood flooring or carpeting
  • New appliances and countertops
  • Longer-life LED light fixtures
  • Addition of community and/or health facilities
  These are long-term capital improvements offering value that enhances rents, good-tenant attraction and retention plus superior occupancy rates.   Recapitalization of multi-family properties may serve another dimension as it relates to ownership. When more than one investor is involved, there may be a difference in investment timelines for each party. For example, an investor may want to cash out in a compressed time frame. Alternatively, another may seek to retain ownership over the long term to enjoy the benefits of cash flow and appreciation of the asset value of the property.   Recapitalizing is often the vehicle that delivers on both objectives.   Summary Given the current interest rate environment, loan money is cheap. That will change over time. So now is the time to explore how you can profit from a set of financing settings that may not prove repeatable for decades.