From Losing Money to Cashflowing by Restructuring a Loan

In this week’s live Drinks and Deep Dives show my co-host was Joe Massey, senior lender with Castle and Cooke Mortgage.  We did a deep dive into how he recently helped a client go from losing money on his properties to cash flowing just by restructuring his loan.  He also answered some frequently asked questions from our audience about the real estate market and interest rates.  

Can a loan be the difference between losing money and cash flowing?

Recently, Joe got a call from an older gentleman who lives in Arizona and needed his help.  He’s retired while his wife still works part time, and their personal home is completely paid off.  The man owns six properties in Pueblo, Colorado that he hoped would support him in his retirement but were doing the opposite.  

Joe took a look at his new client’s properties and saw that he owns two duplexes and three single family homes, valued between $120K and $210K.  On average, he gets about $1K per unit in rent, which is pretty solid from a gross rent multiplier (GRM) standpoint, and should have been making him money.  Instead, he told Joe that he was dipping into his reserves every month just to pay off his loans and was going to run out of money soon.  

The problem was that this client had a blanket commercial mortgage for his properties, meaning that there was one loan for all six of the homes together.  The interest rate on this loan was 7%, which is especially high given that the loan was only 3 years old.  The loan was also variable and short term, which left him scrambling to pay it off.  In addition to the commercial loan worth $700K, he also had $50K in debt from a vehicle and credit card loans from home renovations on the properties.  While he should have been at a point where he was cash flowing in his retirement, he was instead taking out money trying to cover his loans.  

Ultimately, Joe determined the best solution was to break up the blanket commercial loan into individual conventional loans for each property.  There was enough equity in the properties that they only needed to get five appraisals to pay off the debt from the loans doing a cash out refinance. This left the client with one house completely paid off and netting $1K a month in cash flow.  The five other properties still have mortgages, but now have a positive cash flow thanks to more favorable lending terms of a 3.375% interest rate and spreading the debt out from 10 to 30 year terms.  The client closed on all five properties the same day and immediately went from losing money to cash flowing $4K a month and netting $48K annually in rental income.  

This story shows how important it is to have a professional regularly review your portfolio.  If you feel like you’re going to hit a brick wall soon, a mortgage or real estate expert can step in to help you figure out what needs to change.  Other times, you can feel like your portfolio is in great shape, but we all have blind spots that a professional can identify and help ameliorate.  While a financial advisor is great for reviewing your stocks, it’s important to have a real estate or mortgage professional looking at your real estate portfolio.  Even if your portfolio really is in great shape, having it validated by an expert can help you rest assured that you‘re on the right track.  

One of the nice things about getting a loan right now is that the rate is inflation-protected.  Interest rates are currently below the rate of inflation, which means that your payment will stay the same even as rent prices go up.  If you can get your payment down to $1500 a month on a property and you hold that property for 20 years, rents will increase during that period but you will still only be paying that $1500.  Joe is a big proponent of fixed rate mortgages for this reason: it comes with the peace of mind that your payment will stay the same no matter what.  

Denver real estate frequently asked questions

I picked Joe’s brain about some questions we often get from listeners and clients about the real estate market and interest rates:  

Are we in a real estate bubble?

Everyone looks at the increasing housing prices and assumes that what goes up must come down.  But real estate doesn’t follow the laws of physics, which means that prices don’t have to eventually come back down.  Looking at housing prices over the last 45 years, 41 of those years had all time high prices compared to previous years.  While we can expect prices to slow down and for the curve to start to flatten, it doesn’t mean we’re headed towards a crash.  Prices will eventually stop increasing as dramatically as they are now, and people may assume the market is crashing. In reality, though, it will just be a slowdown.  That will mean good opportunities for buyers to find a deal from a panicked seller.  It’s likely we’ll start to see seasonality again and the slow down could occur between September-November this year. 

What are interest rates going to do?

When Joe was in high school, his football coach could only make one guarantee: there will be weather.  Similarly, Joe can guarantee that interest rates will change.  Right now, a lot of programs and stimuli are keeping rates artificially depressed and once those end, rates will increase.  We don’t yet know when that will happen, but we know there’s a lot of room for interest rates to go up and not a lot of room for them to go down.  However, that doesn’t mean the rates are going to suddenly jump to 8% overnight; instead, they will slowly increase to a more balanced level of 4-6% over time.  This is why now is a great time to lock in long term financing. 

Should I wait for the market to slow down before buying?

The best time to buy real estate was 20 years ago, and the worst time to buy is tomorrow; the second best time is today.  The market is probably going to slow down from 10 offers on a property to 3, but property values are going to continue to increase.  If you’re serious about buying and investing in real estate, then now is still a great time to buy.  Joe can attest to this as he is actively looking at properties for his own portfolio right now.  While he used to hold out for a cap rate of 7% for a property, the state of the market means that those properties aren’t currently available in Colorado.  However, a cap rate of 5.5% is still a solid investment that will pay off immensely over time.  

Connect with Joe

If you’d like to get in touch with Joe, you can contact him in just about any way you prefer to communicate.  His direct line is: 303-809-7769, and if he’s busy, it will roll over to someone in the office who can also help. 

• jmassey@castlecookemortgage.com
• https://www.loansbyjoemassey.com/
• He’s also available on Facebook and LinkedIn.  

For more deep dives, tune in to our YouTube channel every Wednesday at noon.  Leave questions or comments, and we can answer them on air.

YouTube Video:

DDD: From Losing Money to Cashflowing by Restructuring a Loan