What would you do in this situation?

22 Replies

@Tony Bevilacqua how much cash would you be putting in your pocket if you refi-d? What kind of positive cashflow would you be looking under those conditions? 

Selling is definitely a viable, and seemingly good, option; but I don't think it's immediately the best option. It depends on your goals are with investing. One plus to note in the 'sell column' is that you can probably avoid some capital gains taxes as the house was your primary residence for at least 2 out of the last 5 years.

Great points Kyle. I am torn on this, if I refinance I may be able to get about $100/month. I am not too concerned with income though; although, I don’t want to be negative each month. I do have a long game perspective on the house and if I refinance, I hate the idea of committing to another 30 years of payments with less favorable terms and a lot more $$$ paid out in interest. I guess I was hoping to get it paid off as quickly as possible so we can potentially live there in retirement debt free (great house in a great location).

@Tony Bevilacqua I have a different opinion here. Don't sell just yet. Look at your numbers more deeply. How much longer will you have this negative cash flow? Look at ways to decrease that $2500. Get more equity. Remember - when you sell, your loss will be realized. When you are still holding it, the game isn't over yet and you still have a chance to turn it around. Let me know if upi have trouble decreasing operating expense. I operate mobile home parks where I decreases many expenses in half on day one. So I might be able to help a little.

This was your primary, it is not making money, it has appreciated, sell it so you can get the tax free capital gains while you are still eligible. You can use the cash out as a downpayment for a cashflowing property that returns more then the $100 a month you get with a refinance. You will likely have similar costs for a mortgage as a refi. A rental that was bought and fixed up as a rental will probably make a better rental because the finishes  can be hardened for a tenant.  

@Tony Bevilacqua

I usually hold on to everything. This might be a good time to sell but answer these questions.

1. Do you make a ton of money? Is 500/mo a drop in the bucket. There may be some long term strategy to keeping it (taxes, appreciation, retirement, ect.)

2. Could you refinance and get it closer to positive?

3. Are you at market for rents?

Usually transactional costs make me hold on to stuff that I already own. If you truly have 100k in equity and you are not cashflowing there is a problem. The market would say that your rents are too low, rate is too high, or it is a high dollar rental home (ex. 1 million+).

@Tony Bevilacqua hard to answer this question because you didn't give us all the details. 

The first and most important thing in real estate is what is the location? Good locations mean appreciation and high occupancy.

What is your cash invested (down payment), interest rate, loan term and years remaining? 

You mention $100K equity, but what is the total value?

I suspect since it was owner occupied that you have low cash into the deal and low interest rate. This is important, because refinancing will require more equity into the deal and increase your rate.

The reason these questions are important is that cash flow is only one of many investment metrics. I could pay all cash for a property and have $1000 per month cash flow, but it may be a worse investment than your property that costs you $500 per month. 

Thank everyone for the insight. I am very grateful!

We bought the property in 2012 for $300,000. 

Today, it's worth about $350,000. 

I currently have $240,000 of debt on the property and we originally put down about $20,000.

I am in the Raleigh, NC area which is growing A LOT. 

I really don't like the $100,000 of equity just sitting in the house, but I also love having renters putting money into my "house account"

I suppose the thinking would be that I can get more bang for my buck by cashing out and reinvesting the $100k into something different. 

Am I right on that line of thinking?

Thanks again for all the insight...I am new to this.

Open a HELOC and use it to obtain another income producing property rather than taking out a loan on it to do so. This way you can pay interest on only what you need for acquisition. One of the best ways I know to acquire for minimal capital is seeking owner financing deals.

One thing to ask yourself is if I lost my income tomorrow how long could I put  out an $500 extra a month to hold onto this house?   Would I need to sell it right away? You are paying $500 out of pocket plus not putting reserves for capital expenditures on this house and not budgeting for vacancy. All those things need to be in the equation. As an investment property you would likely be able to finance 75-80% of the property value so you won't get the whole 100k back.

That said I see you mention you would move back there. If you are definitely moving back to this house in the foreseeable future and want to keep make it  your best bet is to make it cashflow. Otherwise I would sell.

I'd sell and get a more aggressive investment plan to invest in other properties. You could do a house hack with 3-5% down & then get a rental. You say cash flow isn't your first objective so really you need to look at what you really wat. You also say you want to move back to that house, but surely they are other homes that could be better - another poster wrote about a HELOC & doing it that way. You have options, but you have to map out what you really want to do first. That's one of the best things about this business, there are many ways you can go; but then that's also the bad thing if you can't make up your mind.

If you happen to be lucky enough to be at the point of your current tenant’s lease being up. Consider a lease/option to your next prospect. Having a tenant-buyer has significant upsides. Give 12-24 months to cash you out. With a purchase price of 350k, a 5% non refundable down payment will yield you 17.5k upfront, which would cover your $500 negative cashflow for 35 months (that’s about 3 years!). You will still benefit from your mortgage getting paid down, appreciation, and if they exercise the option, you get the cash out over the remaining balance owed. And If they don’t exercise the option, you have the choice to give more time (while increasing the rent), or find another tenant-buyer for another 17.5k and repeat.  You’ve definitely got some options. Fun fact: tenant-buyers pay more in rent anyway! 

@Tony Bevilacqua you are most welcome! I wish you the best...also, forgot to add that putting your tenant-buyer in the mindset of ownership means little to no repairs for you as well as them being less likely to damage your property.

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