[Newbie] - Rental Property - Pay off loan or keep mortgage

13 Replies

Hi everyone. I have lurked on the board for a while and read it but I have a specific question and would love some experienced people to help me figure out if my thought process is correct. Please move this if it's in the wrong forum.

I bought my condo in TX and lived in it for around 73K back in 2007. After I moved to California I started to rent it out instead of selling it. The value of the house is around 100K at the moment.

I bought the house with an 80/20 30YR loan I did when I was young with stated income. Loan #1 has about $48,700 left @ 6.75% and #2 has $10,200 @ 8.75% for a total of $58,900. Taxes this past year was $1,893.00 which are escrowed in the first loan and maintenance fees are $395.00 monthly.

I currently rent out the condo for $1200 a month I basically am at break even after paying the mortgage and maintenance fees.

I have money saved, around 125K that I was using to flip homes with a buddy but we are parting ways and I am trying to figure out if I want to still try to use the money for flipping with my brother in law now or get into more rentals for monthly income since my day job is not doing so well.  He would be on the loans using our money together as down payments. 

I was trying to figure out if it would make sense for me to take part of my money and just pay off the full mortgage because of the higher rates (Can't refinance because I don't have income really so probably won't qualify). I did some simple math and not sure if I am looking at this correctly or completely wrong.

Payoff Loan

  • Income - $1200
  • Maint. - $395
  • Taxes - ~$157.00
  • NET - $648 Cash Flow
  • Years till the initial $58,900 back  - 7.5 Years

Keep Loan

  • Income - $1200
  • Maint. - $395
  • 2 Mortgage Payments (Includes Taxes) - $756.10
  • NET - $48.90 Cash Flow (12,300 over the remaining 21 years of the loan)

So based on this it seems like if I pay it off, it makes a lot more sense for me since I get my money back in about 7.5 years and the rest of the time I will be just making cash flow (Granted these are with price of rent staying the same). If I then take the 13.5 years left to compare it to the rest of the 30 year loan that's about 104K in profit since I don't have a loan that is being paid off. I was figuring if I ever needed the cash back i could always get a HELOC or something.

Can someone with more experience please explain to me if I am doing the right type of calculations to come to this conclusion. Or am completely wrong and not looking at this correctly. If there are any questions or information needed please let me know and I will get you the info to help. 

Sorry for the long post but figured it's best to be thorough. Thanks to everyone in advance. 

My first option would be to refinance to get a lower interest rate...which would raise your cash flow...but, you said financing is out, so onto option number 2.

First, paying off your loan isn't an option. All you would be doing is paying for all that bad cash flow up front, with money you could be using to invest with, in a much better cash flowing property. Based on your info, I've calculated your current payments to be around $500/month for both loans. A new refi at the full 75% of ARV would get you a new payment of only $380/month (4.5%/30 yrs)...$120/month less (added to cash flow) for a new CFM of around $160 - 170. Further, you would also pull around $15,000 out in cash.

If you just did a rate/term to pay off existing mortgages, with the same loan terms, you would cut your monthly payment almost in half....but again, you said financing is out, so onto option number 2.

Second, understand I am in the end, a buy and hold investor.  I say that when I tell you I would flip the property and buy another one with the profits that would have a lower interest rate (the ones you have are really high), a lower maint. fee/month ($395...what do you get for that?), and higher cash flow from the initial analysis/purchase.

$100k ARV - $60k (approx. remaining loans) = $40k profit +/-. Add that to your existing cash, and you are in a much better position to move forward.

good morning khalil, welcome! newbie here too. just wished to introduce myself. formerly from washington, dc, i'm just getting started in the staging arena in california and i'm looking to make some connections as well. thanks and sincerely, sydney

Promotion
Sundae
Property Marketplace
Find Professionally Vetted Properties from Motivated Sellers
Eliminate the need to hunt for houses again. We bring your next investment opportunity to you.
Sign Up for Free

Can you do some kind of streamlined refinance? I'm not well versed in those, but I seem to recall that VA and FHA loans waive a bunch of stuff (I think income verification was one) when it is simply refinancing to reduce interest (not pull out cash). The VA one does NOT require owner occupancy. Is there something like an interest reduction refinance available for normal loan products?

@Kevin Harrison . Yes, which is why I wrote, "Is there something like an interest reduction refinance available for normal loan products?"

If similar streamline-type refinances are available for standard products, then that may be an option.

you really want to refi that house to make it profitable.

if not, I would sell it and trade the unit for one that performs

paying off the loan is not a solution, it's just a really lousy accounting magic trick. You would be trading cash for equal equity, you gain nothing and lose a ton. you would be giving up liquidity for nothing and the only way to get it back is to borrow it back. Also, paying off your note doesn't make your unit perform any better it just means you're subsidizing the future negative cash flows but all up front, like the reverse of a cash-out refinance.

refi the unit, if you can't do that then sell it. It's underperforming and you can't fix that with cash you can only fix it (maybe)  with lower expenses or higher revenue. If you're unsure what bank options you have, find ~20-30 banks, contact each of them and find someone who will work with you.

@Kevin Harrison . If you look into the VA interest rate reduction loans you DO NOT have to owner occupy. Please do your research. The initial loan requires owner occupancy, which is not what we are talking about. In the interest of not derailing that actual question from the original posts, feel free to PM me if you have questions about how a VA loan or refinance works.

I would talk to at least 5 local portfolio lenders before you say "I can't refi" -- you have equity in the house as it is now, and the house brings in income, and you're refing the current balance not cashing out. 

Lenders will look at the income the property brings in when calculating DTI ratios (I hear ~70% of the rents is average) so as long as you have enough in reported income to qualify the rest of it you're good. Big banks generally want to see 2 years of rental income on taxes, smaller/local lenders will typically use anywhere from "signed leases" to "6 months of rental income". The loan amount is likely too small for commercial financing, but that's another good option; in that case generally ONLY the income from the property is used (but they usually want bigger loan amounts)

Originally posted by @Wes Brand :

I would talk to at least 5 local portfolio lenders before you say "I can't refi" -- you have equity in the house as it is now, and the house brings in income, and you're refing the current balance not cashing out. 

Lenders will look at the income the property brings in when calculating DTI ratios (I hear ~70% of the rents is average) so as long as you have enough in reported income to qualify the rest of it you're good. Big banks generally want to see 2 years of rental income on taxes, smaller/local lenders will typically use anywhere from "signed leases" to "6 months of rental income". The loan amount is likely too small for commercial financing, but that's another good option; in that case generally ONLY the income from the property is used (but they usually want bigger loan amounts)

 Thanks for the input. Yeah the reason I said I can't is mainly because my income the last 2 years has been pretty much crap and I figured they would laugh at me. I always thought there must be something since it is a rental property that's signed lease etc. 

Do you have any recommendations of companies that I could speak to that do those kind of things just to see if have a chance with it?

Thanks

I don't know lenders in Texas at all. Best bet would be to take a couple days and set up a bunch of meetings with them in person. You're looking for smaller banks (or credit unions) in the area.

Promotion
Vacasa
Vacation Rental Property Management
We do the work. You get the ROI.
We do it all for your vacation rental. All—marketing, pricing, guest requests, housekeeping & more.
Free income estimate