Author Topic: Sell or refinance rental?  (Read 1730 times)

MyCircus, MyMonkeys

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Sell or refinance rental?
« on: September 23, 2015, 09:11:20 AM »
Hi,
Iíve been working on my budget and my debt since December 2014 (heavily edited version:  spouse wasnít making payments, and I wasnít checking). 

I have two houses (primary and rental), and two mortgages. The second mortgage is a rental (this ended up a rental because we ďneededĒ to buy a bigger house farther from work - but we were underwater).   Iím losing money monthly on the rental, because we financed it 3 years ago as a 15 year note:

$135k ~ at 3.5% for 15 years= $1100/month (payment plus taxes, insurance)
Monthly rent is $995 (when we try to raise the rent price, it sits empty)

Itís rented through 9/2016.  Due to the 15 year note, we finally have equity and can afford to sell the house- and actually make money on the sale too.

Financially and logically, I think we should sell the rental, use the money to pay off the other credit card, and part of the only car payment we have. Emotionally, I see the $100k balance on the rental, and Iím thinking: if I kept this house and moved back into it, my retirement horizon is moved WAY UP.  It has its faults though:  945 square feet, no garage, no basement, really crappy school district. Realistically, I donít think we could ever be happy living there again.

Iím just starting to make $2000 monthly payments on the credit card (prior, was only doing minimum payments while paying other credit card).  I wonít have the second credit card debt forever; only for the next 10 months.

Right now, my credit score is poor, so refinancing is not an option.  However, it may be possible next summer (I donít know, but I imagine my score has to improve with on-time payments for almost two years and drastically reduced credit card). Should I sell the rental in September 2016, or refinance it whenever my credit score approaches 660 (option would be to refinance back to a 30 year mortgage, estimating new mortgage payment would be $480)?

zolotiyeruki

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Re: Sell or refinance rental?
« Reply #1 on: September 24, 2015, 09:05:55 AM »
I'm a bit confused as to which house is which.  It sounds like you were in the 945 sq ft house, bought (and moved into) a bigger house, and are renting out the 945sqft house.  Is that right?  At one point, you say the mortgage is $135k, but then later, you say it's $100k.  Which is it?

If I were you, I'd sell the rental NOW if you can, and in a year if you can't.  You're not going to live in it eventually, and you're losing money on it.  There's no reason to keep it.

MyCircus, MyMonkeys

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Re: Sell or refinance rental?
« Reply #2 on: September 24, 2015, 10:09:38 AM »
Thanks for the advice!

Yes- the first house is the rental, and we live in a bigger house now. All numbers are for the rental:  we originally purchased at $141k in 2008; and later refinanced into a 15 year (the $135k was the remainder of the original mortgage, and the amount that was refinanced).  The $100k is current approximate mortgage balance for the rental.

I'm trying to see the rental as an asset- and one that is actually a liability, since I'm losing money. I found an old article that describes me very well:
http://www.mrmoneymustache.com/2015/07/02/if-you-wouldnt-buy-it-you-should-probably-sell-it/

I don't have the money to break the lease right now.   I'm constantly worried that after keeping the rental for 7 years, I will regret selling later.  Later as in: when I have paid off the credit card and car payment, and begin saving/investing.  I'm planning for that to occur in about two years.  A long way off; but in that time, my credit score goes back to "good" (above 700) due to debt to income ratios and on-time payments.  Is it worth it to hang on for two years, refinance the balance mortgage, and lower the monthly payments so that if finally cash flows?


DaveR

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Re: Sell or refinance rental?
« Reply #3 on: September 24, 2015, 10:18:19 AM »
Financially and logically, I think we should sell the rental, use the money to pay off the other credit card, and part of the only car payment we have.

You've answered your own question.

Not only are you using cash flow to support the rental, but you have equity tied up in the property that could be used to wipe out debt.

Hang on for two years? and spend another $2,400 on it while you wait. Then some refi costs, while you pray there isn't some major maintenance cost. You're forcing cash flow into an "asset" that doesn't provide a good return. If you ran all the numbers, you are years from net positive cash flow (in real dollars).