Is this a good decision? (Refinancing 1st home that's rented out)
Real Estate Investor · Annapolis, MD · Member since 2016 · 65 posts · 12 votes
Hey BP. Back for another analysis question! We own a townhouse that we lived in for a year. We were robbed by our neighbors, which sucks because it was/is a nicer neighborhood, but they are all drugged up and decided to hit us while we were at work. Anyways, the wife didn't wanna live there after that, so we picked up and moved which left us upside down on the mortgage. So we decided to rent it out which turned into our first rental property! However, there is a negative cash flow by far on the property at the moment. But 5, almost 6 years later there is now some equity involved. I just ran the numbers if we were to refinance and continue to manage the property ourselves ( https://www.biggerpockets.com/buy_and_hold_results... ). This would not be a typical cash flow we are searching for ($200+) from a single unit, but it would indeed be cash flowing. Would it make sense to do the refinance and keep the property as part of our portfolio since we already know the ins and outs of the place? The property is in great condition as we have a great tenant in there at the moment. We are also thinking of raising the rent at the end of this lease in August by $25, which would add to the cash flow.
Thanks!
Tim V.
My initial reaction would be to sell (tax-deferred if possible).
But since you are looking at the refinance, I wonder if it would make sense to shop the refinance fees and closing costs to different banks and credit unions. I think you could drastically reduce the cost of the refinance by going to the right lender who isn't gouging on fees.
@Tim Vecchioni are you able to share your current numbers on the property, and future numbers based on the refinancing? Need additional info for the analysis on it. Thanks!
@Matt Faix The numbers should be there via the link in the middle of the post. Here it is again for easy finding.
https://www.biggerpockets.com/buy_and_hold_results...
Looks like that may have expired. Not a Pro member quite yet :( One Second.
@Tim Vecchioni, those numbers look blurry on my screen, but from what LOOKS to be written there, that "red" expenses number is LARGER than the "green" income number!
What's up with that? Are those the AFTER-refi numbers?
My tentative recommendation is: if you have equity - SELL - and buy wiser* next time. All the best...
* By "wiser" I mean: ONLY buy if the investment numbers work. Sorry to read of your "neighbors".
Arg, let me post an imgur of it @Brent Coombs .
There we go. Nah, it would end up cash flowing $67.95 after the refi.
@Tim Vecchioni being that the DCR is 1.07, chances are you're going to have a hard time getting a loan. Most commercial lenders will require 1.15-1.35. Raise the rent up to the market rate (hopefully that's more than $25) and try and reduce any of your expenses.
@Tim Vecchioni, aah, that's clearer thanks. Hmmm. Will your Lender REALLY let you borrow 85% of its value? AND, will that refi get you back enough deposit for your NEXT investment "Buy"?
In general, and in this economy specifically, I don't recommend getting into 85% debt!
MOST Lenders are more comfortable with around 70% of their appraisal, and THAT'S the percentage that is usually recommended to be all-in within. In this case: $161k! All the best...
@Brent Coombs I was doing 80% of $230k which would be $184k. That is why I added the extra $6k under loan fees. Also, we are not looking to get anything out of this property for a next buy but to just make it cash flowing, as it is not now. So in theory, not a complete loss as it would at least be positive cash flow until we decided to sell it. We bought this house 5 years ago for $220k. So the equity we have built is better than if we would have just paid to sell it back when we moved out! This was never designed to be a rental property, but it ended up one so now we are trying to make the best of it!
Also @Matt Faix , fair market rate in this area I believe is actually like $1580ish according to websites blah blah. So I wasn't sure raising it more than $25 would be a bit much to piss off the tenant, or even worse, make him want to leave as he is a great tenant!
@Tim Vecchioni, in short, I still reckon that an average of $68/m (or even $100/m) cash flow is far too little for the $190k RISK that you'd be taking. Also, if it's only appreciated say $10k in the last five years, why would it appreciate significantly extra during the NEXT five years?
ie. I still recommend: sell. (If there's any "should-keep" factors, what are they?) Cheers...
@Brent Coombs There are no "should-keep" factors. However, we were going to ride this tenant out til he moves simply because the house is in great condition and he keeps it that way. So why not just let him pay down the mortgage in the meantime? We were just looking for a way to POSSIBLY keep it after that. Would you recommend just leaving it as is which, let me run those numbers real quick for you so you can see where it stands as is.
This is why we were thinking of the refi even if he stays for 2 years, I guess it wouldn't make sense if we refi then sell when he leaves if in 2 years since we would lose all the money from the refi.
@Tim Vecchioni, based on your latest link above, it looks like MY first response is now valid, right?
ie. The "red" expenses* number is LARGER than the "green" income number!
What happened between the first link and the second link? You were firstly borrowing $190k, but now you think your lender will allow you to borrow $213,400 (ie. 93%)? I don't think so!
Logic would tell me you should be trying to give me the figures as they would be if you DIDN'T refinance, but of course it can't be that, because in that case you wouldn't need to be bringing any further cash to the table. [Sorry if I'm misunderstanding any of this].
But it does make me curious - is the purpose of your proposed refinance mainly just to start the clock ticking again for ANOTHER thirty years? Or is the main point that there are significant savings to be had regarding the CURRENT interest rate available vs the old one?
Another thing I'm curious about: Are you just renting now, or did you buy again?
And if you bought, what would the numbers for your mortgage look like, vs the rent you'd get THERE - if you moved at short notice again? Get where I'm going with that query?...
@Tim Vecchioni, based on your latest link above, it looks like MY first response is now valid, right?
ie. The "red" expenses* number is LARGER than the "green" income number!
What happened between the first link and the second link? You were firstly borrowing $190k, but now you think your lender will allow you to borrow $213,400 (ie. 93%)? I don't think so!
Logic would tell me you should be trying to give me the figures as they would be if you DIDN'T refinance, but of course it can't be that, because in that case you wouldn't need to be bringing any further cash to the table. [Sorry if I'm misunderstanding any of this].
But it does make me curious - is the purpose of your proposed refinance mainly just to start the clock ticking again for ANOTHER thirty years? Or is the main point that there are significant savings to be had regarding the CURRENT interest rate available vs the old one?
Another thing I'm curious about: Are you just renting now, or did you buy again?
And if you bought, what would the numbers for your mortgage look like, vs the rent you'd get THERE - if you moved at short notice again? Get where I'm going with that query?...
I think we are on 2 different pages! Let me give you an explanation of the back story real quick! So we bought the townhouse a little over 5 years ago. We moved out a year after purchasing and decided to rent it out as we couldn't afford to sell it without taking a hit. We have been renting it out for the last 4, going on 5 years. So what you see in the first link, is if we were to refinance on what we currently owe on the house, which is $190k. We bought the house for $220k but it now most likely worth $230k. That would be with closing costs, and I added the $6k in there to get to the 20% down from the Appraised value to remove PMI. Assuming that is how that would work. The second link is what we are CURRENTLY renting out at. That is the current beginning loan we had on the house 5 years ago and what we are currently paying. So I ran the numbers as if we bought the house with the intentions of renting it out to show you the cash flow that we are currently receiving without refinancing. The loan when we bought the house at $220k was an FHA loan, so we only put 7% down. Hope this clears it up and if not, it is early and I never work or think well in the morning!
Are you looking to refi and ADD CASH so that you are financing less, and thus would get a better cash flow? Usually folks that are refinancing investment properties are looking to make their cash flow worse so as to get capital out and go buy another property. It seems that sub 5% price appreciation (from 220k to 230k) does not justify the cost of the refi.
@tim vecchioni
I would keep it and rent it. Properties in Annapolis are only going to get more expensive Let the tenant pay down the mortgage as you have been. You aren't going to make enough to justify selling and your ltv margins are too tight to justify refinancing an investment property considering the cost of fees to refinance and mortgage insurance.
Also, $25 more per month is just going to irritate a good tenant so leave it alone. That little bit won't impact your life at all and will only cause problems.
My two cents
Stephanie
Are you looking to refi and ADD CASH so that you are financing less, and thus would get a better cash flow? Usually folks that are refinancing investment properties are looking to make their cash flow worse so as to get capital out and go buy another property. It seems that sub 5% price appreciation (from 220k to 230k) does not justify the cost of the refi.
This was our personal residence at first. We couldn't sell it, so we decided to rent it out. 5 years later being rented out, we now owe $190k instead of $213k which is what the original loan was for. We aren't looking to pull any money out of the home for another deal as you would in the BRRRR method, we are simply trying to make a property that we still own a positive cash flow property instead of selling it all together. Some cash flow would be better than no cash flow eh? OR, we could just wait until the tenant we have left and sell the property and take the $20-30k in equity that we would receive and use it to find another property. And yes we would be adding $6k to the property when refinancing to get it to the 20% if the appraised value of the home is $230k. The tenant is most likely staying 2 more years but we are at a negative cash flow at the moment with the current mortgage payment. If we were to refinance, we would be in the positive, not by much but we would be and as rent goes up, it would get better. So the decision is to either just keep sucking it up until he decided to leave and sell the place. Or refinance and make it a positive cash flow at the 190k mark and keep the property for even when he decides to leave. Hope this clears up what our intentions are behind the question.
@tim vecchioni
I would keep it and rent it. Properties in Annapolis are only going to get more expensive Let the tenant pay down the mortgage as you have been. You aren't going to make enough to justify selling and your ltv margins are too tight to justify refinancing an investment property considering the cost of fees to refinance and mortgage insurance.
Also, $25 more per month is just going to irritate a good tenant so leave it alone. That little bit won't impact your life at all and will only cause problems.
My two cents
Stephanie
Thanks for the response again Stephanie! First thing, the property is actually in Pasadena. Also, I agree we wouldn't be making much off selling it in 2-3 years. After fees and all, we would be looking at $20-30k pending purchase price. I am a little confused though why a refinance wouldn't be a viable option? It would lower our mortgage payment a good bit to be able to get the property cash flowing, as well it would allow us to rid the PMI. If we are almost 80% into the loan, you would think they would allow for a refinance no problem eh?
@Tim Vecchioni, I agree with @Erik Kubec about the purpose of refinancing. You would normally be borrowing MORE (so long as it still cash flowed SOME) - not paying three and a half years worth of PMI (plus refi fees) up front just so the PMI could be removed thereafter!
So yes, I believe you're right to "guess it wouldn't make sense if we refi then sell when he leaves if in 2 years since we would lose all the money from the refi".
I often remind posters that this site is about getting BIGGER pockets. Consider yourself: reminded!
@Tim Vecchioni, I agree with @Erik Kubec about the purpose of refinancing. You would normally be borrowing MORE (so long as it still cash flowed SOME) - not paying three and a half years worth of PMI (plus refi fees) up front just so the PMI could be removed thereafter!
So yes, I believe you're right to "guess it wouldn't make sense if we refi then sell when he leaves if in 2 years since we would lose all the money from the refi".
ie. Sell. (Did I suggest that already?)...
Well, I am looking at it like this. The home is in one of the better neighborhoods in the Pasadena area. It is in great condition. It would cost say $2,850 + $6,000 out of pocket to refinance down to the $184k we need to be for no PMI. The house at that point would be cash flowing $68 a month as well as accruing equity for as long as we have it. So how long, would it take to make back the $8,850? Well, that would be 130 months at $68, or 10 years. But within those 10 years, how much equity has the property gained?
The second option is to sell in say 2 years. We will have about $188k left on the loan and say best case scenario we sell for the $230k. Let's just assume 7% to be average for closing costs which would be right around $16k. That leaves us with $214k minus the $188k, which is $26k in profit. Not bad! But also not that great for selling off a property after 7 years.
I guess my argument to keep it would be that we plan to keep it for a long time until the equity really starts to dip in our favor.
My argument for selling it is that we could use the profit to really look for a great deal instead of holding onto this at a smaller cash flow. Although it is a cash flow on top of all the expense after the refinance, which is always a plus!
Edit - Just saw you edited your post with that last comment. Yes, that is the end goal! But some of us don't have the luxury to get into the deals like others! Some of us have to keep these small wins to keep our feet wet! Plus as long as it is paying for itself, say 30 years down the road. It will be worth a lot more than the possible $26k we would be selling it for now!
@Tim Vecchioni, to break even, it's not only about the additional $8,850 you'd have to cough up out of your own wallet to refi, but also your $11k negative cash flow since you moved out.
Put simply - this townhouse was NEVER going to be a good investment!
It ONLY suits owner occupiers - who don't care about Return On Investment*.
* (Even though they/you should! Can you please do so - next time?)
I'm still surprised (given the glowing reviews that you and Stephanie Potter have written about the neighborhood) about the lack of appreciation for that property over the last five years. Is it because it's too much like a "cookie-cutter"? Town houses aren't favored there?
Or the biggie: (In light your personal experience), is the neighborhood actually NOT really good?...
@Tim Vecchioni, to break even, it's not only about the additional $8,850 you'd have to cough up out of your own wallet to refi, but also your $11k negative cash flow since you moved out.
Put simply - this townhouse was NEVER going to be a good investment!
It ONLY suits owner occupiers - who don't care about return on investment.
(Even though they/you should!)
I'm still surprised (given the glowing reviews that you and Stephanie Potter have written about the neighborhood) about the lack of appreciation for that property over the last five years. Is it because it's too much like a "cookie-cutter"? Town houses aren't favored there?
Or the biggie: (In light your personal experience), is the neighborhood actually going backwards?...
You have very good points here! I am trying not to think of the past but only the future! We know it wasn't a good investment when we moved out, but we had no choice at the time! However, now we are at the crossroads of keeping/selling! It is an actual viable option now that it could potentially be a positive cash flow from here on out which would ultimately make up for any losses we had after moving out. The neighborhood is a large townhouse only development. The nicest in the area IMO. However, the surrounding areas aren't the GREATEST but are also being upgraded. New stores, High School was recently renovated. Lots of positive things happening in the area! I think Steph was assuming the property was in a different area of Annapolis, but this is in Pasadena. It is the "middle man" of a great area and a bad area to the north. It is very "cookie-cutter" in there as well. So pending the condition of the homes is what brings the price up or down in the neighborhood. There are homes in there listed ranging from $180k to $270k (water view). So to answer your question, I would say no, the neighborhood is not going the wrong direction. If anything, the HOA will not allow that as they are very strict, which I hate, but we have grown accustomed to it.
@Tim Vecchioni, put simply, your personal residence is always going to be largely a lifestyle choice, rather than purely an investment choice. But once it does later become PURELY an investment - it had BETTER earn its keep! But this one? I just don't see it earning its keep. It served its role for a while while you lived there - and EDUCATIONALLY, what you've had the opportunity to learn about the cost of Real Estate (and Real Estate investing) can still stand you in very good stead indeed.
Part of that learning is to work out when to hold 'em, and when to fold 'em!
It's really good that you asked here on this forum. But, we can't decide for you - neither should we.
If you don't mind waiting 10-15 years into the future before your original 7% deposit, and all the negative cash flow since you moved out, plus a voluntary further outlay of $9k - start to give you an actual return, rather than biting the bullet NOW, to get SOME of that cash back for re-investing SPECIFICALLY for double digit returns - which could see you back in the black quicker - then, good luck...
@Tim Vecchioni, put simply, your personal residence is always going to be largely a lifestyle choice, rather than purely an investment choice. But once it does later become PURELY an investment - it had BETTER earn its keep! But this one? I just don't see it earning its keep. It served its role for a while while you lived there - and EDUCATIONALLY, what you've had the opportunity to learn about the cost of Real Estate (and Real Estate investing) can still stand you in very good stead indeed.
Part of that learning is to work out when to hold 'em, and when to fold 'em!
It's really good that you asked here on this forum. But, we can't decide for you - neither should we.
If you don't mind waiting 10-15 years into the future before your original 7% deposit, and all the negative cash flow since you moved out, plus a voluntary further outlay of $9k - start to give you an actual return, rather than biting the bullet NOW, to get SOME of that cash back for re-investing SPECIFICALLY for double digit returns - which could see you back in the black quicker - then, good luck...
I totally get where you are coming from! I do! I don't want you to think I am fighting what you are saying, but instead just bouncing ideas back and forth to learn from every angle possible! This is been a very knowledgeable conversation and I appreciate that! I guess my last question based off what you just said would be, in those 10-15 years, wouldn't the equity the house has formed make it worth it? If we bit the bullet now and took the best case scenario $23k and re-invested it. Would that $23k really help or could we simply do without so that it would eventually become a lot more in equity!? If we found our next GREAT deal, finding that extra $23k shouldn't be an issue right? At least according to the BP community! I guess as much as I want my pockets to indeed be BIGGER, it doesn't make complete sense to me, why you wouldn't wanna keep this property in the meantime knowing it will reward you later. That is the purpose of buy and hold in the first place right!? Another thing I always use to hear in sales was "some money is better than no money" when it came to making a sale.
My initial reaction would be to sell (tax-deferred if possible).
But since you are looking at the refinance, I wonder if it would make sense to shop the refinance fees and closing costs to different banks and credit unions. I think you could drastically reduce the cost of the refinance by going to the right lender who isn't gouging on fees.
My initial reaction would be to sell (tax-deferred if possible).
But since you are looking at the refinance, I wonder if it would make sense to shop the refinance fees and closing costs to different banks and credit unions. I think you could drastically reduce the cost of the refinance by going to the right lender who isn't gouging on fees.
Now this is a quality post! Thank you for explaining your thought process and looking for best ways to help!
I did not look at your numbers (bad links), but it makes sense to me to refi to get yourself out of the red and into the black if you intend to hold the property anyway. If you were to sell it, your equity would barely cover 10% sales costs (these vary by region but that's my rule of thumb) and you'd net $17k? Doesn't seem worth it.
There are refi calculators that can tell you how long the payback is for the cost of the refi, that is, how long you have to hold it to make the refi worth it. Just make sure you're willing to hold it that long.
@Tim Vecchioni, there's too much I/we don't know about your OTHER income and current living arrangement to give proper all-round advice, but I will add these comments:
The equity you will be gaining over the next 10-15 years because your tenants would be (slowly) paying down your mortgage, will NOT be earning you any investment return! All it will be doing is ameliorating your losses at snails pace until that time is fully up! Then, it will generate a little bit of return each year [ie. 5.5%/y, MINUS any remaining mortgage you're still paying off].
Let's look at it from a cash investors point of view: They have $230k to invest. They buy your townhouse. It generates 5.5% net return for them [ie. $12,720/y as a percentage of $230k, with little expectation of capital gain on top of that]. Are they/you getting a good bang for their/your buck? Almost ANY other investment should do better than that!
And you're talking of tying up all your borrowing power for another 10-15 years - BEFORE you start receiving that 5.5% return?
THAT'S my main problem with you keeping it: the "tying up all your borrowing power"!
If on the other hand, you've got plenty of savings, plenty of income, plenty of Lenders lined up just waiting to lend you hundreds of thousands of dollars again straight away, then - what do I know?...