Should I refinance my rental property?

[amicableskeptic]

Background:
I have condo that I'm renting out currently.  Based on all I've read on the forums I feel like I shouldn't be renting it out as I'm barely getting more back from it than its total cost.  I was going to put it on the market this month, but my current tenant really wanted to stay there for one more year (and backed up her need by offering to add $200/month to her rent) so I am extending the lease for 1 year.  Maybe this was a bad financial choice, but she's been a good tenant and so I accepted, who knows maybe the market will improve in a year and my choice will turn into a higher sales price.

I'm still set to put it back on the market next August, but my interest rate is so high that I'm trying to figure out if it makes sense to refinance it now even if I sell it for a year.  To complicate things further I have a significant chunk of cash that I want to invest which could be part of this.

Details
Value: 290-300K
Current Mortgage Balance: 253k
Interest rate: 7%
Current Mortgage Payment: 1800/month
Cash to invest: 30K

Ideas:
1. Put 30K into mortgage as is, get 7% return for 1 year then sell.
2. Put 28K into mortgage so I have 25% equity then refinance to a lower rate 15 year mortgage then sell in a year.
3. Invest 30K into an ETF (maybe IVV) and don't do anything to mortgage.

Questions to the crafty forum mustachians:
Where can I find realistic rates for investment property refinancing online?  I looked at http://www.forthebestrate.com/investment-property-loan.aspx/ and the rates seem unrealistic (it claims Amerisave is offering 3% at 0 points for a 15 year investment loan which just seems crazy).

Am I stupid to do all this refinancing work when I'm just going to sell in a year anyways?

[kudy]

Unless you want the liquidity, I don't understand why you want to sell next year - it sounds like it's a desirable place to live that can fetch rent at a higher rate than you are charging.

You aren't losing money on it, the tenant is paying down the mortgage, and there's potential for earning money if you increase the rent the $200; at least around here rental prices are insane, everyone is renting.

If you can reduce the rate to 3-5% range (I have no idea what is a realistic number for an investment property), your monthly mortgage payment would plummet, putting it even further into the "profitable" range.  So I guess my question is, why are sure you want to sell in a year?

[Another Reader]

If you can get a "no cost" mortgage at a much lower rate, you might benefit for 11 months.  Heck, you could even do an adjustable if you were SURE you were going to sell.  You will have to put cash in to get to a 20 percent equity position, however.  If the property is worth $290,000, then your maximum loan amount will be $232,000.

If you refinance and end up with significant positive cash flow, you may want to hold on to the property for awhile.  If you have a solid tenant and the property is in a high-demand area, you may want to consider this property as part of your diversified investment portfolio.  Do the math, allowing for all expenses, including vacancy/collection loss, the HOA fee, and repairs, maintenance and capital improvements.  Calculate your cash on cash return and consider any appreciation as gravy.

[arebelspy]

Absolutely refi.

At the very least get some quotes and numbers to actually run, instead of guesstimating. I'd wager on it being well worth it to refi.

[Another Reader]

I would agree as long as the payback period for any costs incurred is less than his holding period.  A "no cost" mortgage at a slightly higher rate that still cuts his payment significantly might be the best option for a short holding period.

I see a lot of speculative "what if" questions about refinancing on this forum.  Arebelspy is absolutely correct.  Get several quotes and work with real numbers.  It costs you nothing to shop around.

[Doubleh]

Definitely I'd agree with the recommendations to actually get proces and run the numbers; given the amount of money you could save the little time you'd spend to do this would work out as a pretty attractive hourly rate. I'm sure there are plenty of online calculators hat would assist with the Mary's if you're not comfortable with it yourself.

I'd also echo the comments about seriously considering holding on to he property; if it's covering it's costs now, then with an extra $200 per month and lower mortgage payments you could be looking at a pretty useful income stream.

With regard to rates I'm currently in the process of refinancing my wife's rental (see the post "understanding us mortgages") so was interested to look at your link and its worth pointing out that it does actually say the rates quotes are not for investment properties but are the regular residential rates for those lenders. There seems to be much less transparency of rates in the investment marketplace.

If it helps to know we were quoted 4.25% which has now come down to 4%, anything in this sort of range should make a substantial difference to your monthly costs. It's also worth bearing in mind that we were originally quoted closing costs including a 1.75% Fannie Mae investment property fee which has now gone away - He broker says they have waived the requirement but I am suspect he may be absorbing it, however I'm not familiar enough with the us rules to know for sure.

Good luck!

[amicableskeptic]

Thanks for the replies everyone.  Running the numbers at 4% I think I have to try and refinance.  I compared just dumping 30K into the mortgage as is and refinancing closing in September at 4% and even if I sell next August I will save over 6K in interest which should more than pay for closing costs, so I'm set on that.  As for no closing cost loans, I'll look for them, but I just closed a no-closing refinance on my actual home and noted that there was a clause in it that dumped closing costs back on me if I pay off the mortgage in less than 3 years, so I don't think it works with my idea of selling quickly.

As for the question of why am I set on selling so I figured I should address that and see what you all have to say.  I definitely value your advice.  When I read through the forums here people seem to say your rent should pay almost 100% more than your costs to cover repairs, vacancies, etc.  This condo's price, taxes and condo fee makes me think getting a return anywhere close to that.  Here are the numbers (all monthly).

Taxes: 222
Condo Fee: 291 (likely to rise 3% a year or more)
Mortgage Interest: 750 (if I refinance to 4% @232K, obviously decreasing over time)
Missed investment income: 280 (Assuming I could realize 280K cash after fees of selling and invest equity at 7%)
Rental Income: 1870 (but 1700 is more likely after current tenant moves out)
Tax Deduction savings: 315 (25% of taxes, fee and interest, but might not happen if I exercise my stock options and get hit with the AMT).

So 222+291+750+280=1543/month is what I'd need to just break even on costs without factoring in tax deductions.  Putting in the deduction brings it down to 1228 but with 1700 for rent that's just 472 per month which would only allow a few months of vacancy each year and if the condo building needs a serious repair (it's over 30 years old) a big assessment would totally wipe out these gains. 

So, that's why I'm convinced to sell it.  Looking over the numbers I feel like maybe I could hold another few years to wait for market improvement if I get the refinance all done, but I'm not sure if that is worth all the work of renting, the increased AMT amount and the danger of a big fat assessment or bad renter screwing me over.  Thoughts?

[arebelspy]

Looks like a clear cut sell to me (especially with the numbers being based on a refi at 4% and still being pretty bad).

[hardworkingpenguin]

The first choice is to refinance as I wouldn't recommend selling ever. If you don't mind me asking where is this condo located?
Even though you are not cash flowing now, don't forget the benefits of depreciation and amortization. As years go by your loan amount gets less and less. Just let it sit and have it build equity over time. Rents will always go up, but your payments will always be the same.
What is the real market value right now? I would not want to pay 6-10% in selling fees you will almost get nothing back.
This almost seems like a great scenario for a buy subject to the existing loan. You can look at my blog and check the entry for creative real estate for other ways to selling your real estate. Who knows, maybe I'd consider buying it :)
But I think the best way is for you to refinance and keep it forever.

[amicableskeptic]

Just wanted to close out this thread with a final update.  I closed on my refinance yesterday.  I ended up getting 3.125% on a 15 year loan with .625% back towards my closing.  This let me end up with only 2K of "real" closing costs (money that just disappears).  There were another 2K of "faux" closing costs (escrow money used to pay taxes and insurance fees that I was going to be paying anyways).  I am just blown away by how low interest rates are right now.  I refinanced my own home at the end of Spring and only got a rate of 3.5% for a 15 year loan.  That refi had zero closing costs so it was a little different but to see that a rental refi is down to 3.125 now with points back is just mind blowing.  I feel certain that savvy shoppers can refi their own residences for under 3% right now, which is just amazing.

As for this loan I had to put in 33K of cash so I had enough equity for a commercial refinance but doing some calculations it totally seems worth it.  Going from a 7% 30 year to a 3.125% 15 year loan (with an extra 33K in equity) has dropped my monthly payments by $200 per month in absolute terms, and has reduced my monthly interest payments by a whopping $900 per month.  I still plan to sell the unit next August (which is one of the reasons I went for the lower rate 15 year over the slightly higher 30), but in just 10 months I'll have saved $9,000 in interest!

So, what is my rate of return?  Well it starts at $9,000, but then I must realize that I don't get to deduct this off my taxes so I'm losing that savings and it's

9,000*(1-.25)=6750

I also spent 2K that I wouldn't have otherwise spent in closing costs so this drops again

6750-2000=4750

Still making 4750 guaranteed over 10 months from a 37K investment isn't too shabby, giving a no risk 15% annual return on investment.

(4750/10)/37000*12=.154054....

I still don't think it makes sense to rent this unit in the long term, but I am happy to waste a bit less on interest in the short term.  Here are my final rental cost numbers

Taxes: 222
Condo Fee: 291
Mortgage Interest: 573
Tax Deduction savings: 271
Missed investment income: 320

222+291+573-271=815/month in costs

So the condo is costing $815 per month in money that will never come back to me.  As the condo fee rises this will get to $830 or higher next year.  Right now I've got it rented at 1870 but 1700 is a more likely rate for the next year as my current tenant is paying a bit above market so she didn't have to move (but next year she's definitely gone).  So 1700 revenue per month minus 830 expenses means a real return of $870 per month.  If I have one month of vacancy then it takes 2 months to recoup the losses.  That is slightly encouraging but it isn't even counting the investment income I could make off the principle if I had it invested.  If I throw that into the mix my real return is only $540 per month, meaning a month of vacancy takes 3 months to recover from (and with a 15 year mortgage the equity in the place rises so fast that this missed return also rises at a fast pace).  With that in mind I think the decision to sell next year is made for me (barring another ridiculous real estate value drop).  I'll be sure and post my for sale details up here when I'm ready to sell next summer.  Who knows maybe a fellow mustachian has different rental logic (like hardworingpenguin) and would like to take the property off my hands (and we could split the savings on ridiculous realtor fees).

Hope these numbers are helpful to others looking to refi.

[arebelspy]

Well done for following through.  Making $4750 over the next year before you sell for a few hours of refs paperwork is well worth it.

Thanks for the follow up!