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.
@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.
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.
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.
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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