25 year loan or 30 year loan on a refi?

Question

We have just one rental unit (used to be our primary home), and I'm in a situation where I need to refinance. It's a 5/1 ARM and due to the increasing interest rates and two HOA hikes in just the last year, I'm now losing $190/mo. I have just shy of 23 years left on the loan.

I'm looking at four options and would really appreciate some advice.

#1) Refi with a 25yr loan and still be losing about $27/mo (which I can afford to do)

#2) Refi with a 30yr loan and get about $55/mo

#3) Do a cash out 30yr refi since the property has appreciated nicely and I have some pretty good equity in it. But, I'd take the cash to go buy a second rental property. BUT, I'd then be losing around $160/mo on the place.

#4) Just sell the place

What are your thoughts? Is there something else I should be considering? Again, I really appreciate the advice.

Ned Carey · Answer

@Adam Williams based on how you post is written I am guessing the numbers (losing $190  Month, get about $55 a  month) means that is what is left after subtracting the mortgage payment form the rent.

If my guess is right you are losing a lot more that that much a month. Every repair, vacancy, citation etc is gong to make you go even deeper into the negative column.

Unless this property is appreciating  significantly I would sell it and put the money into a better investment.

Adam Williams · Answer

Thank you @Dave Foster! I'd love to take a look at any resources you have.

Brian Ploszay · Answer

I would think you should sell it.  This is your only rental, therefore you're not a professional landlord.  Especially if you do not live in the area.

You say you are losing between $27 and $55 per month.  But you will also get potential depreciation on your taxes, plus a portion of your principal is being paid down every month.

If this is a very solid area, you'll inch towards having a valuable asset in the future.

Dave Foster · Answer

@Adam Williams, The gross numbers don't show up in your post but when you talk about 30% appreciation coupled with a current operating loss I'm guessing you're sitting on quite a bit of under utilized capital.  Primary residences converted to rental don't often make the best rentals.  A refinance in a situation like that is problematic because you're stuck with the terms as you mentioned and you don't get access to 100% of the equity.

The 1031 exchange would let you reposition that equity into something or some things that would produce much better cash flow and not leave you negative.

I've got some educational resources I can send to you to learn more.  I'll PM.

Steve Vaughan · Answer

Ok. Didn't see it mentioned.

Just making sure you weren't missing out on $50k or something tax-free while buried in $22 cash-flow decisions.

Ned Carey · Answer

@Adam Williams  a 1031 exchange is great if you can pull it off.  There are some relatively short timelines when using them.

Adam Williams · Answer

Thank you for your advice. I have not factored in the tax benefit of the depreciation in my calculations.

It has been appreciating nicely the last few years, which was my primary reason for holding onto it. But the market is slowing. So I don't expect massive appreciation or a rise in rents (in fact, I think the rent is near the cap). So I've made a decent return on the appreciation, but it seems that at this point, the money could be better invested elsewhere.

With everything that's going on in the market, where would you focus on looking for deals? Thanks!

Adam Williams · Answer

It's appreciated about 30% since we bought it. But unfortunately, we haven't lived there since 2012. So the cap gains tax has in part held me back from selling it. I've done a 1031 exchange, but I'm considering that.

Adam Williams · Answer

Thank you! If I sold it, I'm guessing that a 1031 exchange is the way to go. Would you agree, and if so, are there any resources that you recommend to learn more about those?

Steve Vaughan · Answer

If it appreciated a lot while it was your primary, you might consider selling if you haven't rented it out for more than 35 months.     Can still get the capital gain tax exclusion if lived in for 2 of past 5 years.

25 year loan or 30 year loan on a refi?

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