I have 2 properties in California both under a trust:
- 1. A 3bd/2ba rental home with a 10-year interest only loan about to adjust to LIBOR in 2016. Renter has been with us for over 18 years.
- 2. A free and clear 40 acre ranch with a 3 bd/2ba house and a barn
Here are the numbers on the rental:
Value = $180,000
Loan = $183,000 @ 5.8%
(ITI) mortgage payment = $1082 a month
Rental =$1050 a month + $152 monthly HOA
Here are the numbers on the 40 acre ranch:
Value = $350000
Loan = $0
Interest only payment = $0
Gross Income = $16000 a year
Net Income = $5,000 a year (agricultural income)
I would like to get out of the interest only loan on the rental because it will adjust to LIBOR rates. Even though LIBOR rates are low it will adjust every year for the next 20 years. Ideally I would like to get a low fixed rate loan, but not exceed the rental payment amount to much. I have excellent credit and can back the loan, but I would like to loan to be issued to the trust.
What would you do?
Well it doesn't look like you are making anything on the first one but it could make a nice nest egg. Talk to some local credit unions and mortgage brokers and see which one is able to give you the best deal.
Your libor loan will likely adjust down just slightly. With the margins on most libor loans, we see them working out to about 5.25 to 5.75. I would normally recommend, letting it adjust to your benefit. However, the fed announced last week it would start adjusting interest rates, so the libor will likely adjust too because our dollar is much too strong agains the european currencies that influence the libor. So, lock in your rate within the next few months.
I wouldn't touch the ranch. Your cash flow is perfect the way it is, and having any debt on it decreases it much too much. My 2cents
@Jassem A. - Yes that rental is the issue. Cannot refi-because there is no equity.
@Robert Sepulveda - Do you suggest I look into selling the rental before interest rates increase? I cannot refi or get a fixed loan because there is no equity in the rental. Maybe do a lease option on the rental instead?
I am hoping a mortgage lender would chime in.
You have to be careful with lease options, charging above market rent.
Here are some tips to prevent the lease option from being a disguised installment sale.
1. The rent should be at or near fair rental value. Breece Veneer & Panel Co., 232 F .2d 319. Get a written opinion of the rental value from a qualified real estate professional.
2. Keep rent credits toward the option price to a minimum. Generally, 20% or less is considered reasonable.
3. The option price should be at or near fair market value. Get a written opinion of the market value from a qualified real estate professional. Breece Veneer & Panel Co., Ibid.
4. Try not to tie-in substantial lessee improvements with the option exercise.
5. Do not pass legal (or equitable) title to the optionee\lessee\buyer.
6. Demonstrate that you intend to do a lease-option and that you believe the rent and option price to be reasonable. See Benton, 197 F.2d, 745; Lester, 32 TC, 711. Use arm's length lease-option documents along with the counsel of qualified professionals.
I would probably start paying down some principal along with the interest until you are in a position to refinance.
I'm guessing the tenant isn't interested in becoming a homeowner if they've been renting for so long.
I doubt interest rates will get very high anytime soon to where it would make a very big difference in the mortgage payment; Maybe the tenant will make up the difference?
What happens after the 10 years is up?
On a smaller loan, a fluctuating interest rate isn't going to do much to change the payment very much. If you can find the note along with terms of the ARM loan as far as adjustments are concerned, you should be able to calculate what the adjustments may look like. I can help you out if need be, but we're still in early 2015 so it's hard to predict where the LIBOR will be then! :) At that LTV for a rental, you'd be hard pressed to find anyone to do just a straight refinance. I don't know of anyone.
Here's a solution. You could refinance the ranch and take cash out, then refinance the rental and pay down the mortgage to an acceptable LTV. All of this assuming you can qualify with your income and such.
You'd also have to take the property out of the trust temporarily to make the refinance loan happen (not sure if you knew that or not).
Hope that helps.
If your current loan is an FHA, you could streamline the refinance without the need to value your property. You should speak with a banker or broker who deals with HARP loans as well to see if you qualify. They are designed specifically for underwater properties, but the rental status may be a deal breaker.
@Brian Gibbons - Thanks for chiming in on this one. I have been doing a lot of education on your programs and how you do your lease options. I am still learning so I appreciate you giving me the details about Breece Veneer I will have to read up on that too. Boy things have certainly changed since the early 2000's.
@Jassem A. - Yes I could make extra payments from the ranch revenue and pay it off in 10 years and have another free and clear house. The tenant says that she is not in a place to do it (I think credit) and I didn't push the issue.
@Jeff Trevarthen - Humm great points. I forget that a $183K loan in California is small. The rent rates really should be at about $1300 a month, so I can increase the rent over time. Plus prices are starting to go up again. I do have the note details, I will PM you for help so that I know how to calculate it in the future. I didn't know I would have to take it out of the trust to get a loan.
@Robert Sepulveda - I tried the HARP route and the loan was not FHA, Freddie or Fannie so no HARP loans on the rental.
Thanks all :-)
GA is an awesome state for REI!
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