Should i wait or refinance right now?!

Question

Hi everyone. I'm in Montrel, Quebec, Canada. And the question is more of an opinion that i need. I bought my duplex around 3 years ago. I was living in it for the 1st year and my upstairs tenant was and still is paying below value. I'm still losing approximately 55$ a month which is not alot but still not ideal. All renos are done by me and out of pocket. I still have 2 years and 2 months left on my mortgage before i should refinance and have a 7-8K penality if i go that route.

Now i know things are very different up here in Canada so i'll try and explain as best I can!

Rent coming in 1513$ month   18156$ year

Mortgage           1179.49         14153.88

insurance             114,20           1370.40

Taxes                   270.37           3244.44

+18 156$- 18 768.72= -612.72$

I may be able to refinance and pay the penality and have a cashflowing property but have no money extra. I think it should be cashflowing between 150 to 250 a month. I just have to check my credit to see if it took a hit with my personal mishaps.

What would you do in this situation.

Thanks for your help!

Justin Daoust · Answer

And The regie du logement allows us to raise by appr .6-.8%..... The next year.

Justin Daoust · Answer

@Roy N.

The Tenant upstairs is more like 150$ below market. I end up paying 55$ out of pocket each month. And yes, I'm on a 5 year fixed. Had no choice. But looking at all this today. I might try and clean my credit real fast and try refinancing by putting that 7-8 000$ hit on my new mortgage. I don't know if I'm just dreaming or if it's possible... But I'll check next week with a mortgage broker to see the possibilities.

Thanks!

And thank you @Doug McLeod

Justin Daoust · Answer

@Doug McLeod

I would end up putting the penalty in my mortgage if possible, or else it wouldn't be worth it. Up here in Quebec...the laws are better for the tenants than landlords. I can't hike up rents as i wish.

Roy N. · Answer

@Justin Daoust

Sounds like you have a 5-year fixed-rate mortgage.   As Doug alluded above, you need to sit down and do the math to see if the reduce interest cost of your new mortgage would offset the early pre-payment penalty on your current mortgage.   I suspect the answer will be no.

When your renewal time does come around, have a serious look at a fixed-term variable rate mortgage.  The come with lower interest rates; early prepayment penalty is typically 3-months interest; and many offerings have CAPs or the right to convert to a fixed-rate mortgage if you feel the need.   Yes, the interest rate floats with the prime rate, but you can manage that volatility yourself (rather than paying the bank to manage it) by simply setting your payment the same as it would be with a fixed-rate mortgage of the same term.

We use exclusively variable rate mortgages on our residential (1-4 unit) properties simply because of the flexibility.

If your tenant upstairs is $55/mth below market, you could try to gradually bring them closer (within 3-5% of market) by increasing their rent in small steps over 12-18 months.  We frequently do this when we acquire a property where rents are substantially below market (>=10%).  Tenants know their rents are low and most are anticipating some increase when a building changes hands - the goal is not to shock them into moving (unless they are undesirable).    A couple of years ago, we inherited tenants whose rent was $100/mth below market.  We sat down with them and laid out a timeline were we would increase the rent by $25 immediately and then adjust each quarter over the 18-months to recapture the rest.   The are now paying 3% below market (market moved in that 18-months), but that is fine by us in exchange for a good long-term tenant.

Doug McLeod · Answer

The penalty is much larger than your annual negative cash flow - it would take years to recoup.  Are there any escape clauses in your loan - like if you were to sell? If so, that could be your best option.

If your rental market is tight, you might be able to raise the rent on the bargain tenant to reduce the bleeding a bit, but sounds like you have limited opportunity to restructure the financing (big penalty) or the cash flow (more capital improvements to get higher rent?).

Put the options on paper:  refi and take penalty, raise rents with as little cap improvements as possible, or sell.  Consider your time and effort besides the cash flow.