Back during the financial crisis, investors were sitting at an average Loan-to-Value (LTV) ratio of 81%. But now, it’s down between 50% to 60% or even lower. That’s a big improvement, and it gives you a huge advantage.

Let’s break it down with an example. You have a current $50K loan with a 30-year fixed rate mortgage rate of 5% on one of your properties. The property is worth $140K and you have $90K equity. Your feeling pretty good about your leverage but still thinking of tapping into that equity.

Here’s the numbers:

$50,000 loan
$1,335 yearly taxes
$875 yearly insurance
$745.33 PITI monthly payment
$15,600 yearly rent ($1,300/monthly)
$6,656.04 yearly net income (Yearly Mortgage – Yearly Rent)

But when you start looking deeper, you find you’ve got other debts, short term hard money/private lender loans and credit card debt financing renovations. Here’s an example of what that might look like:

$25,000 private money loan at 10% = $208.33 interest only/monthly
$15,000 credit card debt at 22% = $275 interest only/monthly
$483.33/ total monthly interest payment

$745.33 PITI + $483.33 = $1,228.66 – $1,300 rent = $71.34 monthly cash flow.

Here’s another way to look at it:
$50,000 mortgage loan
$25,000 private money loan
$15,000 credit card debt
$90,000 combined debt
$1,228.66 total monthly payments

Your blended interest rate is a whopping 16.253%.

And you want to wait until commercial interest rates drop? Suddenly, you’re seeing the financial situation in a whole new light. You realize you need to pay off those debts.

As it stands at the time of this writing (3 May 2024), the best commercial loan interest rate available is 7.4% at 75% LTV cash out with a $105,000 loan.

Here’s the breakdown:
$105,000 loan amount
$908.67 PITI monthly payment @ 7.5% interest

$908.67 – $1,300 = $391.33 monthly cash flow.

All your debts are paid off, you increased your cash flow 18%, and you still put some money in your pocket after closing costs.

Instead of just focusing on waiting for lower mortgage rates to arrive, you can tap into your current equity and tweak the loan-to-value ratio to lower the rate and maintain a cash flow positive position. Consider a lower LTV (from 75% to 70%), buying down the rate 1 point, and extending your pre-payment penalty period. All this can lower your refi rate even more. Essentially, you’re restructuring your debts, narrowing the gap between your current and future mortgage payments.

This strategy may not work for every scenario, especially if you lack equity in the properties. However, for those with ample equity, it’s a game changer.

By shifting your mindset, you can adapt to changing market dynamics and effectively expand your portfolio.