Rent or Sell?

Question

Hi. I currently am renting my house in Illinois and moved out to Arizona. I still owe 145K on the mortgage with 15 years to go on a 20 year loan. It currently appraises at 260-270K, I am renting the property for $1500. After all the expenses, I have a negative cash flow of about $300. Would refinancing to a 30 year loan and building equity make sense?

Thanks!

Steve Vaughan · Answer

I wouldn't be doing a long-distance rental I can't see and maintain.  I was going to ask if you had any gain that would qualify for the cap gains exclusion on primary residences, but sounds like it's a non variable.

I like @Gautam S. suggestion of offering to current tenants on a lease option.  Whatever terms work for the both of you.  Otherwise, I would try and sell.  Tough to do thought with renters in place most times.  Good luck!

Gautam S. · Answer

If it is not cash flowing then just sell.

Also you can also ask the tenant if they want to buy this house... then may be setup a Rent To Own deal with ~$15K option deposit.

Good luck!

John Powell · Answer

DO you plan on moving back it IL? sounds like that was a personal house not an investment. I'd consider selling if you can break even. Use the money you are saving to intentionally invest. Investing by default is not normally a good strategy unless there is an outside factor that you haven't mentioned like big appreciation potential, family ties to the house Ect.

Rafael Norat · Answer

@Franz Fernanez

I think you really have to look at your criteria and see if zero cash flow works. Not sure, because at that point you're speculating appreciation, which is more of a gamble than investment.

Refinancing to break even and using the cash to by a cash flow property may make sense. Or trying to just sell it, get your cash, and focus on cash flowing properties..

Don't buy one like this again! LOL.

JR T. · Answer

SELL. There is no way for you to make money with this property. Just get out of it and go on with your life.

Franz Fernanez · Answer

@Steve Vaughan; @Gautam S.; @Vishal Gadhia;

@Jerry Bruckenheimer

Thanks guys! ..really appreciate it. It looks like it's going to be a rental increase if the tenant agrees Or maybe a lease option. They are currently into their 3rd year on a yearly renewal.

Jerry Bruckenheimer · Answer

Hi, as others have mentioned long distance landlording can be difficult and good renters can turn bad. A question I've had to ask myself is; can I afford to hold the property for the potential long term gain if I lose the rental income for an extended period of time i.e. current tenant stops paying, long eviction process, potential rehab of damages, time spent trying to a new tenant, etc. It can be a lot of stress. A deciding factor for me might be relationships you maintain in the rental state; do you have trusted friends in the area willing to keep an eye on things, trusted contractors you've used in the past and can call on for fairly priced repairs, a solid rental property insurance policy, etc.

Vishal Gadhia · Answer

@Franz Fernanez

You have a few options.

1. Work the numbers and see if 30 year refi makes sense. If you refi just what you owe right now and not pull out any sweat equity you have, you might be able to get a to break even.

2. You can do a Rent 2 Own just as @Gautam S. said.

3. If you have great tenants, as you say, ask them if they are OK with increase in rent by $200-300, so that you can break even. Tell them you are considering to sell as its a negative investment for you.

4. If they are good tenants, and they want to live in the same house, I guess they should be OK with the rent increase.

5. Sell, and get everything out and invest closer to you where numbers make sense.

Hope that helps.

Franz Fernanez · Answer

@John Powell

Hi John! Yes, it was a personal house and turned into a rental. I think I'm gonna break even with current appraisal .

@Rafael Norat

The maintenance is built in to the lease-that the tenants are responsible for.

If I did a refi just to break even on expenses (Zero Cash Flow) and with appreciation rate being slow in the area,... would it make sense to hold just for the equity it would generate for another 2-3 year lease?

Thank you for everyone's input!

Franz Fernanez · Answer

Thanks Gino!

I am trying to hold off on selling since we have good tenants. I think I could get at least couple more years from them. I am hoping the refi would take care of the negative cash flow, build equity then sell..but then the property hasn't appreciated much since the bubble and I'm afraid of another downturn.

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