Update from last post, and a new question

[jsloan]

I posted a couple of weeks ago and received some great advice to refi a rental that we are making very little money on in order to get a better rate and improve cash flow.  The original post is here: 

https://forum.mrmoneymustache.com/ask-a-mustachian/in-need-of-some-direction/msg15455/#msg15455

I followed that advice and was able to lock in a rate of 4.25%.  My wife and I knew that we might have to come to closing with some cash since we do not have 25% in the property, and we were prepared to do that, but I just got off the phone with the loan officer and the property appraised for 17k less than we bought it for 9 years ago.  Now it is going to require substantially more cash than I was expecting.

To get the loan to 75% LTV we will need about $38,000 at closing.  We have about that much in non-retirement savings between a brokerage account at e-trade and savings accounts at ING, but it will pretty much clean us out and we will have to liquidate our emergency fund.  The upside is that if we did go ahead with the refinance since the loan amount will be even lower we will be earning an extra $500/month from our twinplex while we are currently only making about $25/month. 

So what do you think?  Should we forget the refi?  Sell the property?  Or go ahead and do it and work to build our cash reserves back up? 

All suggestions welcome.  Thank you! 

[arebelspy]

Going from earning $25/mo. to $500/mo. gains you $475/mo. X 12 months/yr. = $5700/yr.

5700/38000 invested is a 15% return.

Basically you can invest that 38000 you have into your rental and refi and get a 15% return on that money... Sounds worth it to me.

[Another Reader]

Get a copy of the appraisal immediately and review it for accuracy.  Call the agent that sold you the property and ask for current comparable sales and rents.  Appraisers are very conservative these days and occasionally they make mistakes.  If you find significant problems with the appraisal, it may be worth pointing them out to the lender.  They may send the appraisal back for review if the errors are egregious or order a second appraisal, which you will have to pay for.

If the appraisal is accurate, you will have to decide if you want to risk putting all your reserves into the refinance.  Operating a rental propertal property without cash reserves would keep me awake at night, unless I could cash flow a major repair.

[James]

I think in a true "emergency" you would find some way to pay the bills, just need to figure that out now rather than later. You could set up a LOC on your primary residence, probably the best option.  Worst case you could borrow from or pull money out of retirement accounts as needed.  Once you have settled that question, I think arebelspy's math demonstrates an excellent return so I would go for it.

[englyn]

Good advice already, and James has given me another idea. I should add I'm in Australia, so it may work differently here, but here you would borrow a small loan eg. the $38k secured against your residence for investment purposes. Then you would use the surplus money per month to pay your personal loan on your residence (not tax deductible here) instead of your investment loan (tax deductible here). Obviously your rules are different :)

Or maybe a different bank will give you a slightly worse interest rate but a slightly better valuation. They do vary.