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 ...
Only US citizens should be allowed to own land.
“Hard to believe the owner thought going from a 5.14% interest rate to a 7.9% interest rate was a good idea.”
Maybe he had a variable rate loan. If prevailing interest rates went up, his rate would go up also.
I spread mine out across many mutual funds in many asset classes (including two real estate funds). The idea is to not try to pick the industry that's going to do well. On the whole they average up over the years. I have over 30 of such mutual funds in equity asset classes (counting the high-yield bond fund as an equity fund even though it's technically not).
IMHO when you get near retirement put 25% of your money in mutual funds that are traditionally "safe" funds, again spread out across many asset classes (i.e. short-term corporate bonds, long-term corporate bonds, LT treasuries, ST treasuries, money markets).
The idea is that if you have a withdrawal strategy of 4% annually, and if you experience a huge stock market downturn where everything in equities is down, you have about 6 years worth of "safe" assets to withdraw from for the equities to go back up. And usually you don't need the safe funds anyway because in most stock market downturns there's usually some industries that are up anyway (i.e. in 2020 the tech and health care funds did well when most of every other equity classes went down).
Letters like this usually start with “Dear Penthouse,”
Could be. There probably are a great many things about this situation which are unknown to us.
I find, when the details are looked at, decisions are easier to understand.
However, people also make a lot of stupid decisions based on emotion.
The biggest contributor to inflation for the last few months is owners equivalent rent (OER). Rent is determined by the cost of ownership, e.g. maintenance, mortgage interest, and property taxes. The Fed has increased mortgage rates deliberately. This homeowner had to refinance in order to take out money for repairs. He is not the only one facing this problem. In particular, multi-family mortgages are often shorter term, like 5 years, especially on large properties. So interest costs are going to go up as all the mortgages in the country gradually have to be re-financed at higher interest rates. That will continue to increase OER. So the Fed is actually creating inflation.
He must have had a balloon mortgage instead of locking in a low long term rate when money was cheap. Voluntarily refinancing “from 5.14% to 7.9%” isn’t a rational decision.
I’ll yield to someone with recent experience, but the old rule of thumb was also monthly rental rate was 1% of the value of the property.
Of course water heaters were a lot cheaper back then.
Another dolt that fell for the “ unlocking your equity “ scam .
That depends on just who rented said property.
As a real estate entrepreneur, I know that my rental investment assets have 5 profit centers. The largest of these is EQUITY. This guy has negative cash flow which can likely be remedied with the lease renewal. The smartest thing to do is get a part time job, rather than losing an estimated 4.7% compounded yearly interest value (over a 10 year market cycle)! His rent should increase at least 4% year over year. If it’s a single level ranch, then it will become far more valuable in ten years as the Senior Tsunami hits and boomers sell their 2 stories to downsize so that they can age in place (which will be an estimated 37% of them!!). I bought my first rental asset in 2000 and it wasn’t always a positive cash flow, but I sucked it up and lived poorly for a few years. Today, I’m a millionaire, heading toward the multi-milionaire goal in 5 (barring the likely nuclear holocaust). It’s tight for me right now because I’m not liquid. Hope he sucks it up, fixes whatever problems are eating his money, and takes whatever is left of that $100k and buys more properties!
If anyone wants to join my real estate podcast, please look up Not Your Average Investor Show.
It sounds like he is using common core math in his finances, and actually believes the results he arrives at.
Yes; but where will you find a buyer?
My rental pulls in .5%.
It is doing ok. Good tenants, 100,000 mortgage and 375,000 worth. Will pay it off this year. 2008 home in TN.
I will retire in it and sell my primary home.
Uh, next time try running the numbers first. I’ve found that tends to work best. Business 101.
I thank you all for your comments here. The best concentration of useful info I’ve ever seen on FR.
He took $100,000 in cash but his interest payments went from a little over $16 K to over $33 K a year, not a good deal.
If he needed the cash, he should have taken a short term personal note or if his credit was bad, sold the property.
There is no way to financially justify a doubling of your annual interest payment on a rental property where the annual income is stagnant.
Our rental pulls in .5% also. Worth $800k
NO mortgage is nice.
No way it could ever justify 1% - and in today’s world I don’t think any property could.
$420,000 on the property, which is worth approximately $750,000.This guy is merely an inefficient middleman for the real owner of the property, the bank.
Over 80% of the adult male invaders who are willing to make an honest living want to work in construction.
Imagine what that is going to do to construction wages, and housing construction costs.
Paying more than the 2016 prices for housing is pretty risky.
When making an offer on property, include pictures of the invasive onslaught and write “Most males want to work construction” on the pictures.
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