Refinance or sell? Advice please.

2 Replies

In January 2013, we purchased a SFH in SW MI for $145,000 w/ $21,750 down (LTV 85%), APR 4.375%. The house has been rented continuously since closing with rent at $1250. Our monthly cash flow has been $180.

We received our annual escrow analysis last month.  The non-homestead taxes have caught up to us.  The annual taxes have gone from $2190/yr to $3583, thus pushing our mortgage payment alone to $1300+/mo thus erasing all cash flow. Our tenant signed a new one year lease just days prior to receiving this news.

If we sold, comps show we could expect a sell price between $150k-$160k. We would not regain our down payment according to our calculations. Thus we have decided to refinance. The bank will only refinance to 75% LTV not the balance of the existing mortgage due to it being an investment property.

The new numbers look like this:

Loan amount $112,500, APR 4.25%, closing costs $12,145. New cash flow will be $187/mo. The total amount invested will go to $33,895, however, equity will increase.

It has been our plan to hold the property as a rental.  It is a solid house w/ no need for major maintenance (roof/windows, etc.) anytime within the next 5 years. 

Thoughts?

@Chandra Yates is the $1300 new payment you mentioned PITI? You might be better off eating $100/mo. for one year if thats the case. See if you can raise the rent at that time and hopefully you see some appreciation. By the way $12K for closing costs??? Whoa!!! Find a new mortgage company at the very least.

@Rob Beland

I think Chandra is including the cash needed to bring to the table to refinance (to bring from 85% LTV to 75% LTV) in those closing costs. considering that, it's not so bad.

That said, @Chandra Yates if it were me I'd sell, the opportunity cost of your money is higher that way.

Scenario 1:

Refinance. You've now got $33895 working to make 2244/yr (for a CoC return of 6.6% though that's not really relevant in this comparison). Already, you're better off putting it in an index fund (not really, assuming appreciation and tax benefits, fine.

Scenario 2:

You sell. Assume sale price is $150k, closing costs are about 5%, you get $142,500. Your existing loan is probably around 118k (assuming 30 year loan). You now pocket the difference - $24,500. Now you turn around and buy a better rental, maybe one that meets the 2% rule - So you buy a $98k house renting for $1960/mo or based on the 50% rule with a $370/mo mortgage you're cashflowing 610/mo or $7,320/yr. This investment is 3 times better than refinancing.

So you can't find a 2% property? How about a 1.5%? $4380/yr net after debt service and 50%. Your break even point is a property renting (gross) $1,114/mo. If you can't find that, then refinance, keep your equity. But to me equity is useless, you can't do anything with it. Especially when the market could turn at any time - so I'd cashout and put that money to better use. But that's just me.

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