Refi rental back to 30yr or stay at 15yr at net loss?

5 Replies

First, I am brand-spanking-new to real estate investing (but we are currently on our 5th home) and secret messages or excessive acronyms will fly right over my little newbie head.

Second, the property in question is not a deliberate investment, it is a home we were unable to sell. Will go into more detail but wanted to be sure that was out there, first. Well, second.

We moved from IL to MI in December of 2013, sold our home of residence, bought a new one here in Michigan, and left behind the home before the last one. We bought it in 2006 at the height of the market and when we found our dream home in 2010 we were unable to sell it so we rented it out. We were in the process of refinancing from a 30yr fixed rate to a 15yr fixed rate when we found said dream home.

Currently we have excellent renters and an excellent property manager for a home in a community where the real estate market might never recover. Literally. We are not underwater on our loan, but we definitely take a loss each month of about $200 after making our mortgage payment (insurance and taxes escrowed in) and paying the manager. And, of course, any repairs that need to be done. The home could potentially sell for what we owe, but is still highly doubtful.

Now that DH and I are preparing to begin searching for actual investment properties the question arises: should we leave the IL rental at status quo and have it paid off free and clear in ten years or should we refinance back to 30 years and free up some cash flow?

In summary:

-home is unlikely to sell at all, let alone break even 

-home is unlikely to acquire any additional equity (can give more details)

-tenants and property manager are awesome

-property is out of state to us now

I am willing to share necessary details, but given that I am unsure which details are actually necessary I will leave it to you all to ask the questions.

Thanks in advance,

Shannon

I would start plugging numbers into an amortization table.  If it were me I'd plan for a 30 year refinance just to create monthly income.  Rather than spend it or apply it to principal, I'd recommend saving it in a secure account/investment of your choice.  You can use the amortization table to determine when your cash balance will be greater than your principal balance, effectively paying the house off in the same short time, but having the comfort of not coming out of pocket each month.  The lower note also makes owning the property easier during transition between tenants.  You've got options.  Good luck and let us know how it works out.

Best, -Robert

@Robert Lockwood , that makes a lot of sense, and jives with one of the things I have considered, except that we would reinvest the cash profit into the mortgage.  Saving makes sense, though, particularly as we begin to think about things like roof and carpet.

So a quickie calculation (not including closing costs) reveals that to refi to 30yr leaves us with about $116 positive cash flow NOT including repairs and maintenance. (Tenants do all lawn care, etc., thank goodness!)

Does that change things?  Is there a thought that ANY positive flow is better than a negative flow?  Banking $116 +/- a month will pay for a furnace in a year.  Our roof is a tricky, difficult one and will take nearly six years to save for.  Which, ironically, will be getting close to when a new roof will be due.  

I know this math is simplistic, but it is good practice for me and my mindset.  Thanks to all who take the time to help me start re-framing my thought processes.