what to do with an extra house high interest rate/mortgage?

Question

Hello everyone! Interesting question as I am just starting out with real estate and would like to use an extra house i already own for rental property. 4 bd, 2 bath 2000sqft single story, 2 car garage, tract home in a nice neighborhood in Gilbert, AZ. i've compared comps and looks like similar homes renting for about $2-2400/month (not including utilities). we bought the house originally for family to live in and be close by. the mortgage is $3700/month. purchase price 550K in 2023 with 5% down. we painted and put new laminate tile/carpet costing $8K total.

Would you keep it and do cost segregation studies to get some tax benefits? or sell it? I estimate we would make at the most 10K if sold today (does not include transactional costs. Do I refinance? short term, long term rental potential? I would like to keep it as its in a good area and I feel price will appreciate over time.

thanks!

Would you keep it and do cost segregation studies to get some tax benefits? or sell it? I estimate we would make at the most 10K if sold today (does not include transactional costs. Do I refinance? short term, long term rental potential?  I would like to keep it as its in a good area and I feel price will appreciate over time.

thanks!

LaTarence Dunbar · Answer

I’d be interested in taking a closer look at this before you decide to sell. The negative cash flow at the current mortgage payment is definitely something to work through, but if you like the location and believe in the long term appreciation, there may be a way to structure it differently rather than giving up the property.

I’m interested in investing in opportunities like this and would be open to discussing a potential partnership or investment structure if the numbers make sense. Feel free to DM me. I’d be interested in seeing the property details and running through the numbers with you.

Joseph Zimmerman · Answer

I run my custom P&L on each of my two Chicago rentals every month, and the mortgage payment sits on it split into principal and interest. Principal moves money onto my own balance sheet, so I read that piece as savings. Insurance and my condo's assessment get their own lines, and both only hit once or twice a year.

On your house, a $1,300 to $1,500 monthly gap is roughly $16,000 to $18,000 a year out of pocket, against about $10,000 of equity before closing costs. Your $8,000 of paint and flooring belongs on a capital line. Cost seg is a question for your CPA.

Noah Corwick · Answer

Hi @Amanda Bisla. Tough situation to be in for sure. That's a lot of negative cash flow.

You mentioned that it was bought with the intention of using it for family. Because of that, is it furnished? If so, you could see what it would look like on the STR or MTR market. It being a MTR with 3-6 month minimum leases could be a nice sweet spot for you if being in the STR game is unappealing. You can rent it at a premium, not have to get into the management minutia of a short term tenant and have flexibility to pivot with shorter leases. Obviously the comps need to show if this is even possible though.

For either scenario, I'd also explore not hiring a property manager and just managing it yourself so you can keep as much money in your pocket as possible. If the comps don't check out or the STR/MTR routes don't make sense, it might make sense to stop the bleeding and sell it.

Drew Sygit · Answer

It's EXTREMELY difficult to cashflow when you only put 5% down.

Is the house furnished?

If so, maybe consider STR or MTR for more rental income.

Be careful of blindly selling.

If you sold today and got $10k, how would that help you buy another rental property?

You'd have to put 20% down, so the $10k wouldn't be enough.

You could save the $1500/month loss you'd be avoiding, but how long would it take to save up at least $50k to buy another rental?$50k / $1500 = 34 months.

How much is this property projected to increase in value over those 3 years?

And with only $50k, what Class of property/tenant will you be able to afford?- The lower the Class the MORE headaches & challenges!

Don't really care what you do, just trying to help you see all the angles🙃

Theresa Harris · Answer

That is a large difference between your costs and the rent.  Once you factor in vacancies, maintenance and repairs, the difference is even larger.  I'd sell.  If you want to buy a rental, use some of the money from the sale to buy a new rental.  You'll need 20% down.  Most of the time buying and selling 2-3 years later, unless major renos are needed, you are going to break even.

Mason Weiss · Answer

I think with this large of a negative month over month it doesn't make sense to keep the property. If you were less than $500 negative I could see the value for tax purposes and long term appreciation but I think this delta is too wide.

Joe Piccirello · Answer

Hey Amanda. Gilbert numbers are the whole story here. At about $3,700 PITI vs about $2,200–$2,400 market rent you’re looking at roughly $1,300–$1,500/mo negative cash flow before vacancy, maintenance, and utilities if you cover them. Cost segregation is a CPA/tax move; it doesn’t fix the payment gap by itself.

If you want to keep it, the real fork is the loan: a rate-and-term refinance (or buydown if you have cash) only helps if it meaningfully drops the payment into the rent band. Cash-out usually makes the payment worse. LTR at those comps is the cleaner underwriting story; STR can show higher gross but insurance, furnishing, and management eat a lot of that in the East Valley. Model both before you commit.

Selling for about $10k equity before commissions/closing costs is often a wash or a small loss, so “sell to stop the bleed” only wins if you don’t want the carrying cost while you wait for appreciation. Happy to walk the payment math / refinance vs hold tradeoffs if you share rate, remaining term, and roughly how much cash you’d put toward a refi.

what to do with an extra house high interest rate/mortgage?

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