Posted on 03/02/2024 4:15:16 AM PST by where's_the_Outrage?
Dear Big Move, I’m struggling with the idea of selling a rental property that has both a high monthly maintenance fee and a high mortgage rate. The costs to keep this house are currently higher than the monthly income it generates.
I recently refinanced in order to pull out $100,000, so now I owe $420,000 on the property, which is worth approximately $750,000.
My recent refinancing increased my mortgage rate from 5.14% to 7.9%, essentially eating up all my cash flow.
I’m on the fence. Should I sell, or should I refinance for a better rate to free up cash flow?
Losing Money Fast
Dear Losing,
The fact that you’re bleeding money from this rental is not good. You need to either bring down your interest rate or raise rents so you can turn a profit in order to make it a worthwhile investment. But keep in mind that many people are sitting on the sidelines waiting for interest rates to fall, so you might not get your desired price if you decide to sell.
(Excerpt) Read more at msn.com ...
To make matters worse 2 major storms did considerable damage to the property, the insurance did not cover it all. So basically all my rental income went back into the property for the past year. Good thing I planned for this eventuality.
Bottom Line, I would not recommend rental property as retirement income. Sell the property before you retire.
Rental is very difficult to make money if you have a mortgage.
Refinancing at 7.9% shows the stupidity.
As the owner says he owes $450,000, assume the loan was for that amount. The difference, 2.76% a year, amounts to $12,420 more a year in interest payments.
That’s what I was thinking for sure!
This person is NOT a bottom line business person and should probably watch more Shark Tank, pausing to run the numbers they do on the fly in their heads.
HODL ! Property never goes down. ;-)
Really though, dump it.
1. If the numbers he is presenting are correct, then he’s got a negative cash flow even with a low mortgage balance relative to the value of the property. He’s not charging enough rent.
2. Why would he refinance at an higher rate AND take another $100,000 out of the equity if this move put him in a cash flow crunch that is a problem for him?
Why did this guy refi from 5.14 to 7.9? That likely speaks to other issues in his life, the best of which would be that he’s lousy at math.
I would also have to believe the renter pool quality has fallen considerably in the last few years. Thank you, Democrats.
I would not want to be a landlord these days, unless it was on a large enough scale that you could hire all the necessary services and still make money.
The guy should sell it to a real person, not a foreign entity, who wants to live in it.
As was said, not if you have a mortgage on it.
I have a rental property that has struggled to keep up with the monthly costs but it does have a small mortgage. Most years it was right at break-even or may just a touch over. While I was still working in my career, it wasn't much of an issue as we used the home when we could, rented it during high season(FL). Now that I'm just doing inspections and side work, it's become tougher to hold up those expenses
That said, the home has appreciated in value about 1/3rd, so we're going to sell it this year. Once sold, It will reduce all our expenses to basic utilities on our current home. No mortgages, no car payments, no nada and we will have around 100k left over. I can coast into early retirement and relax until I'm gonzo.
Yes. Refinancing and taking 2 points up the pooper was about the stupidest thing I’ve ever heard. This person should sell his house, have a huge yard sale, buy a cheap house for cash and then take some real estate classes. He done screwed the pooch.
Translation: I increased my overall debt by converting an asset into spending money. So, "Losing Money Fast" seems unable to grasp simple notions. You either 1) have or 2) do not have assets / liquidity, by degree.
So where to put your investment dollars then
At a minimum a rental property should show a profit of two months rent annually after saving two months rent for repairs annually and with any mortgage/tax/insurance costs being covered with maximum six months rent allowing for two months a year being unoccupied.
I would also figure the payoff on a seven year mortgage (max of ten).
If it doesn’t fit these parameters you are looking for trouble. Oh, I also plan any tax benefits as gravy.
Be strict with yourself as an owner and fight the urge to pull profits for spending until properties are paid for.
Good luck, WWG1WGA!
He should be optimistic and hold on until things get better. There’s still a lot of equity to lose.
Meanwhile he continues to drop $1000 a month covering that ridiculous note. Win/win right?
Had rentals and didn’t care too much if they made much,, but they had to cover expenses. Always. Did very well off that model. The money was made with the initial purchase and gentrification.
Considering the MASSIVE run up in real estate prices a few years ago and the fact that there has not been a price correction in the market yet, I would sell. I think the current home prices are unsustainable.
Historically, sellers have been very reluctant to give back any of the paper gains they “made” on their property so they often choose to sit on their property rather than sell it, but historically sellers lose that battle with buyers and are eventually forced to sell even though it often takes several years for this to play out. If you can sell now and capture that price increase, I’d take it. I don’t think it will last.
We are hoping our rentals will serve as a nice chunk of our retirement revenue.
Few have rules anymore and many follow the real estate always goes up mantra. There will be pain.
After that covid no rent dictateI we experienced, I would never invest in rentals again.
I have a simple rule to follow on my rentals. Monthly rent is based on 1 % of property value. So an 80K property is $800 a month rental. That pays the mortgage, taxes and upkeep with a little left over on a 10-12 year mortgage. I don’t depend on rent revenue for income but for building equity in the property. When I say property value that does not mean that is what I paid for it. I can buy a house for $35k, put $20K more into it and turn it into an $80-90 k house easy.
“I recently pulled money out” (mistake 1)
“increased my mortgage race to 7.9%” (mistake 2)
“The costs ... are currently higher than the income” (well yea braintrust, you didn’t own a calculator before doing this?)
and genius here now wants to know if, having screwed himself, if he should finish the job by now selling at a loss, spending the $100k he just took in cash in realtor and other costs, and walking away with no income and no property?
Suck it up, buddy. Vote Trump and look towards refinancing again at better rates.
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