Rental House Question

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golfpro65
Posts: 13
Joined: Mon Jan 02, 2012 9:24 pm

Rental House Question

Post by golfpro65 » Sun Mar 04, 2012 10:46 am

Looking for advice and ideas here on a rental house that my wife purchased in 2002.

Original Purchase Price = $120,000 w/ an interest rate of 5.875%...amount remaining = $94,000

The Rental House is a duplex that is currently occupied w/ 2 tenants. The monthly rent is $500 per unit + utulities. So it is a little more than the current $900 monthly mortgage payment.

We looked to refinance earlier in the year, but the rental house was appraised for @ $85,000 (can't quite recall the exact amount, but it was less than what we still owed). In order to refinance we would've needed @ $20,000 add'l dollars at closing...which at the time we didn't feel comfortable putting more money into our rental house, which has been more of a burden than an investment property.

We've tried to sell it a few times, with only mild interest. The area the house is in has declined in value much quicker than we would've thought. A realistic sale price would be between $75,000 - $90,000.

We are in a position to pay off this loan completely. Is that our best idea? Or should we refinance? Or look to sell the house ASAP?

Other Debt:
-No credit card debt
-Auto Loan…yr 2 of 5 yr. loan, $30,000 remaining, interest rate = 4.04%
-Primary House…yr 1 of 15 yr. refi, $180,000 remaining, interest rate = 4.00%

*No prepayment penalty on Rental or Primary House Loan, unsure @ Auto Loan

Tax Filing Status: Married filing jointly

Tax Rate: 25% Federal 5.45% State, Ohio

Age: Him 34, Her 35

Thanks...Matt

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damjam
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Re: Rental House Question

Post by damjam » Sun Mar 04, 2012 11:01 am

golfpro65 wrote:... our rental house, which has been more of a burden than an investment property.
That's your answer right there.
If it's a burden I would sell it, especially since it's a losing proposition when maintenance and other expenses are factored in.

golfpro65
Posts: 13
Joined: Mon Jan 02, 2012 9:24 pm

Re: Rental House Question

Post by golfpro65 » Sun Mar 04, 2012 4:18 pm

Selling is our preference...but we've tried unsuccesfully over the past few years. If we are unable to sell, it seems like paying down the mortgage would be our best option. We have cash on hand and can pay down the full amount. Is there any good reason why we shouldn't do this? I hear it's the equivalent of making the interest rate on the amount owed. In this case 5.875% on $94,000...which viewed as a bond sounds like a great no risk return.

Matt

golfpro65
Posts: 13
Joined: Mon Jan 02, 2012 9:24 pm

Re: Rental House Question

Post by golfpro65 » Mon Mar 05, 2012 9:38 am

Our main concern is paying off a house in full, (in this case $94,000) that is likely not worth as much as the remaining mortgage. Should this be a concern? It seems like we'll need to pay off the mortgage at some point, regardless of whether the house sells for less, the same or more than the existing mortgage. I'm just a little hesitant because I don't fully understands real estate sales, mortgages and paying off a loan early.

golfpro65
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Joined: Mon Jan 02, 2012 9:24 pm

Re: Rental House Question

Post by golfpro65 » Mon Mar 05, 2012 12:22 pm

The Beholder wrote:I'd suggest you "loan" yourself the difference, and make payments to yourself to reduce the $20,000. You should still be able to write off any interest you charge yourself or need to pay. As long as the cash flow pays the loan, your laughing (though it may not feel like it). As time goes by, other people will still pay off all the money, so you'll get it back. Even if prices continue to fall, as long as it's cash flow positive, your fine. If you sell, you'll lock in your losses.
I'm sorry, I don't really follow this...any help? It sounds like the suggestion is to pay down the $20,000 so we can refinance??

rogermexico
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Joined: Tue Jan 08, 2008 5:58 pm

Re: Rental House Question

Post by rogermexico » Mon Mar 05, 2012 2:31 pm

If the loan is freddie or fannie owned it would be eligible for refi under the HARP program... rates are not the best but this would avoid the loan to value problem. Of course you'd need to look at whether the refi costs are justified by savings on interest over the period you expect to own the property.
Also I'd look closely at cash-flow to see if it's at least cash-flow neutral. I'd guess you're probably losing maybe $100/mo, but that'd partly be made up by amortization. If its much worse than that, then you might consider selling.

golfpro65
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Joined: Mon Jan 02, 2012 9:24 pm

Re: Rental House Question

Post by golfpro65 » Tue Mar 06, 2012 8:15 pm

Many thanks...this is all really great information. I need to read the article you linked me to. But it sounds like I should be able to sit down with our lender and negotiate a refinance w/ or w/o paying down 20%. My initial thought was to simply pay the full amount owed, but now I may not be able to come up w/ the full 94K all at once.

Also, how would I know if our loan is owned by Fannie or Freddie?

gwrvmd
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Location: Calabash NC

Re: Rental House Question

Post by gwrvmd » Tue Mar 06, 2012 10:49 pm

Re: The Beholders replies
The HARP (Homeowner Affordable Refinance Program) is just what it says: its for homeowners which means owner occupied property.The question was about about multiple unit rental property. The program was designed to keep homeowners in their homes not to bail out the investors in multiunit rental property. If you do not live in the property, the HARP program is probably not applicable.
Disciple of John Neff

ilmartello
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Re: Rental House Question

Post by ilmartello » Tue Mar 06, 2012 10:53 pm

sell it and forget it
Here's some numbers that should scare the pants off you.

Even assuming you could refi to a 15 year at 4 percent, monthly payment for a 94,000 loan is $700.00 /mo


So let's run cash flow.
Income off rent : $1,000
---

Mortgage $700.00/month
Repairs: $120.00/month (using rule of thumb of about 1.25 percent of the home's value, but I bet on this kind of property it could be closer to 2 percent).
Property Tax:
Insurance (liability and fire, perhaps tornado or flood if your area requires:).

After plugging in the numbers for those two, even with a generous re-fi you are going to be barely running even assuming full occupancy.

On top of that, you already have debt on your primary home.
Are you maxing at your 401k/ roth's every year? You have auto debt also. Do you want so much of your net worth tied into two properties in one state, especially one like Ohio, that is declining in population relative to the rest of the country?

Sidney
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Re: Rental House Question

Post by Sidney » Tue Mar 06, 2012 11:11 pm

The Beholder wrote: I'd suggest you "loan" yourself the difference, and make payments to yourself to reduce the $20,000. You should still be able to write off any interest you charge yourself
Isn't this how the guys at Enron got started?
I always wanted to be a procrastinator.

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