Refinancing a Rental- Good deal or not?

Question

Have a rental that is currently at a rate of 7.6% 30yr fixed with PITI/mth of $975.  Right now it is break even cash flow. Rents in that area range from $950 to $1150. I am attempting to refi under HARP which allows 105%.  On the refi my rate would go to 4.25% -30yr fixed with a PITI/mth of $690. Thus  generating $285/mth cash flow.  Here's the problem. I need to bring $13k to closing to do this refinance because of the drop in value.

I plan on having the home for a while just due to market conditions in that area not making selling an option.

As investors, do you let a bad deal(no cash flow with minimal appreciation)remain as is and utilize cash elsewhere or do you pony up the $ to refinance and turn it into a better investment from a cash flow perspective?

Thansk for any feedback.

Matt S · Answer

I mean there is no PMI.

Matt S · Answer

No PMI included.

Steve Babiak · Answer

Does your new payment amount include any PMI (or other mortgage insurance payment) that comes from having LTV greater than 80%?

Tim M. · Answer

I tend to agree with Nathan Emmert on this one. Your 13k IS an investment, and it would be getting you about a 26% cash on cash return with this refi. Unless you could park this 13k elsewhere and get a greater return, the refi sounds like a good strategy. Plus the benefits of buying equity, etc. The only downside I see is you now wouldn't have that money available for CapEx or repairs - maybe consider taking some (or most) of that new cash flow and setting it aside for this repair 'fund'.  After you sell in a few years, anything left in this 'fund' is your profit. Of course, if the fund is depleted by then, then it was all a moot point... I suppose it all really depends on how much CapEx or repairs will be needed in the next 4-5 years.

Luis A. · Answer

This argument is two sided because when the house is vacant you would still have to cover the payment of $600 however if you refi now you don't have the $13k in the bank to cover it as you otherwise would if you don't refi.

Matt S · Answer

to answer a few questions here. 
1. I do plan on keeping this investmetn for 5+ years as i don't see the market in this area improving enough for a sale to make sense in this timeframe. 
2. The 105% is the option I have to use based on appraisal($90k) vs principal($102k)  Original appraisal when purchased was $148K. 
3. I've considered using that $13k elsewhere, possibly a better investment property(with bigger cash flow). But when this rental is vacant covering a nut of $975/mth is not an easy task. Plus it's a larger home so paint and carpet costs are higher than my other rentals.  My thought was to buy equity to better prepare for a vacancy-which of course will happen.

Bill Gulley · Answer

Your improved cash flow will take almost 4 years to pay you back. My thought is to hold off as IMO, if it don't eat any hay it's not costing you anything. So if it really is breaking even I would let it ride as I believe values will increase and interest rate should remain fairly low for a couple more years. When you see rates creeping up I'd reevaluate the circumstances. In the mean time use that 13K on something that makes money.

Bryan Hancock · Answer

Do you have other refinance options that don't involve putting down so much money?  Is the 105% option because it is underwater?

A 2% drop and a 3-year payback is what I look for generally for refinances that don't involve pulling cash out.

Nathan Emmert · Answer

That's almost a 30% cash on cash return on your investment... are you going to find better deals than that with other investments?  And really, you're "buying" equity with that $13k, it's not an expense per say, just a conversion of cash to equity.  Your true return on expense is much higher.

Luis A. · Answer

You will be saving $285 per month if you refinance. But since you have to bring the $13k to the table as you have probably figured out already it will take you 45 months to get your $13k back.

On top of that you have to figure out the cost of your $13k not growing or not being used to produce more money somewhere else due to the fact that you used them for this.

My first question to you is, how long do you plan to hold this rental?

It sounds you might be better off staying as is then using that $13k to invest somewhere else and also cover your maintenance/repair costs since the rental is not making you any money.

If on the other you plan on holding the rental at least 5 years then I would consider it if you don't need the $13k for anything else. If you keep the rental for 10 years then it would make a lot of sense to do the refi.