Got my first rent check..... Now what?!!

14 Replies

Bought my condo 2.5 years ago on east side of Oahu.

Original loan amount $379000
Interest rate 3.75% no money down or PMI 5/5 arm

Current balance is $360000 roughly

My tenant currently pays $1900 a month which covers my mortgage payment and escrow account. Does not cover any HOA fees

HOA fees $356 a month

I currently gross $5800 a month from my two jobs only. Not including the rental income.

Condo value has gone up in 2.5 years
Current country assessed value is $397000

I do not know what to do at this point with my money.
I'd like to set up the condo on a better mortgage that would also allow me to make positive cash flow of $100 or more.

I'd also like to keep moving forward towards buying my second rental property.

I currently live for free with family so I'm not worried about finding my own personal dwelling yet.

What would you seasoned investors advise me to do in my current situation? I have no reserves for my condo. I have no significant debt and I have a good credit score.

Should I save? Should I go for a HELOC? Refinance?

Aloha.

Personally, I would try to refinance to change from an ARM to a fixed year loan. From my understanding the Federal Reserve is still in contemplation of increasing the interest rates. We don't know when that will happen, but if that do happen you are SOL. The point of rental real estate is to have as much cash flow as possible. You are negative cash flow because the tenant's rent only cover for the mortgage and the escrow. That means you are using your own money to cover the HOA fees. So you are -356 a month on rental income, big no no. Fix that first and then figure the rest out.

My personal opinion is that you sell the condo. You are losing money on rent and there is equity sitting in the property now. If you sell the condo you can use the cash made on the sale to invest into a cash flowing property. Even if you refi into a more favorable loan you probably won’t be able to reduce the mortgage enough to cover all the expenses and make money on the rental. Even if they are paying all of the utilities there are still repairs to be made and some cap ex (I know in a condo these will be less but you still have some). The other thing is property management fees. Some people will say that you can self manage and save money to make it work. My question to you is, why would you do for free what someone else would get paid for doing? This means that even if you’re self managing you should be paying yourself the same as you would a property manager for managing for you. All these expenses are surely not being accounted for currently and I do not think a refi will free up enough to cover them all. Again my opinion is to sell and invest in another property.

Personally, I would sell this condo.  Maybe I'm missing something but why would you keep it?  It's not making you money.  In fact, it's costing you money....$356 a month....and that's without accounting for repairs, capex, vacancy, etc.  So the real cost is actually much higher.  What's even worse is the fact that you have no reserves.  That's just trouble waiting to happen.

And you can't get a HELOC on this property as you don't have nearly enough equity. You're currently at 95% LTV and I've never seen a lender go anywhere near that high on a HELOC for a non-owner occupied property.

Like I said before, unless there's more to this story that wasn't posted, I agree with @Michael Minor - sell this property and find another one that you could actually make money with.

@Tina Acevedo ,

So, you're paying over $350/mo so someone can live in a unit you technically own, but it's costing you money..?  

Personally, I think you need to refinance ASAP for more favorable terms and make at least $50-$100/mo just to cover maintenance,  or sell it out right.. no good investment makes you lose money! 

@Tina Acevedo Sell the condo. A $100 per month positive cash flow property is not a deal. Cash out and find something that performs better.

@Tina Acevedo you financed the property with owner occupied terms, which is why you were able to purchase with no money down. If you go to refinance as a rental property, the mortgage terms will require 20% equity and the interest rate will be over 4% because investors pay a higher rate.

I would sell the property. You will be forced to refinance in 2.5 years and you will be lucky if you have 20% equity to even write a new loan at that time. It could be even worse if there is a recession when you go to sell, because property values in vacation markets are the first to take a hit. That is because when financial hardship hits, vacations to Hawaii are not a high spending priority.

In the future if you purchase a primary residence and convert it to a rental property, make sure to get a 30 year fixed loan term. Then you can retain the loan long term after you convert it to a rental property.

Sell the condo since you will never achieve positive cash flow. It is a very poor income investment property.

@Tina Acevedo you're discovering a very important concept in real estate investing.  It doesn't matter how nice the property is or where it's located, the rents absolutely must be supportive.  In this case, it sounds like you have a nice condo in an amazing location, but only getting $1900 a month will never make sense.  If you're in the red each month, and you have no reserves, and you've experienced some appreciation, sell it now.  You're spread way too thin, but you can fix that very quickly and set yourself up for a nice springboard into your next property.  Best of luck!

@Tina Acevedo I can appreciate your situation.  On the one hand, you are building equity in a property that is valuable.  On the other hand, it isn't completely covering itself, and is costing you money.

I think to come to a wise decision, you need to vet each option accurately in order to compare them and determine where your money is best invested.

First, to discuss the loan and/or the option to refi... Did you purchase this property as an owner occupied Borrower 2.5 years ago? If so, any refinance MAY end up raising your interest rate as interest rates are higher for investors than owner occupied Borrowers. NOT to say that you couldn't still find a favorable loan that would at least take you out of the ARM in favor of a fixed rate, but it may not lower your payment. It may raise it instead. I would check with a lender to get your options there.

Secondly, selling the property just because you don't cash flow on it right now isn't always the best option.  So, while I can appreciate and respect the other investors' thoughts on the matter, I don't agree that it should be an automatic decision to sell.  Sometimes making more in equity means making less in cash flow.  You trade pennies for dollars.  You have to determine if your $356 investment (That's what it is) is better served in helping to pay on this investment while the value continues to rise, or investing it in another property.  Only you can determine that once you have the options in front of you.  

My suggestion would be to look at other purchasing options.  Run numbers for what the mortgage payment would be...and the rental rate.  Compare that property to the one you already have and see which one would be more fruitful.  Ultimately, YOU need to determine which investment is better for the investment strategy you have chosen for yourself.

As a side note, you DEFINITELY need reserves for anything you do.  So, please at the very least build some reserves.  As you add to your portfolio, the lender will require anywhere from 3-6 mos of reserves for each property's expenses.  Some lenders require 6% of the assets' loan balances, which may be even more than the 6 mos figure.  So, be aware of what the lender will require to make sure you are prepared for your next purchase.

Best of luck to you!

I agree with some of the other commenters. Because the condo is not cash flowing, I would sell it at a profit. First, do your homework and find a new market/property to 1031 exchange into that will have positive cash flow and potentially allow you to increase its value as well.

@caralonsdale yes I bought as an owner occupant and lived in it until this last august. That's when my renter moved in and I moved out. I recently filed taxes (quarterly G.E.)on the rental income and was told that my HOA fees are all going to be write offs when I do my taxes in April. Has anyone else put HOA fees down as a write off before? In Hawaii right now the current median sale price for a condo is $420,000. I feel my condo could sell somewhere around 400,000$. I have talked to a local lender that would do a HELOc with LTV 95% . If I could obtain a HELOC on this property I don't know what would be the best thing to use it towards? A cash out refinance sounds achievable. I'd only have $20000 in the property if I did it now, I'm assuming all of that would go right back towards the condo for closing costs?

Sell that huge liability ASAP

@Tina Acevedo your GET will be on your gross rental income, so you won't "write off" that amount from your GET. You can, however, include your HOA expense on your federal schedule E.

I am not a tax expert. You may want to seek advice from one.

Sell sell sell. With a value of nearly 400K and rents of only $1900 a month it makes zero sense as a rental.

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