HELOC to pay off rental condo

[gspeicher]

Hi-

First post. Well, second if you include the one I made in the Welcome thread.

I currently own a condo worth around 145k (this, according to Zillow, which is likely a bit high) and owe 109k on it. I'm looking at options to free up the cash flow generated by this unit.

Rent is $1250 per month and rents fairly consistently because of its proximity to a great school district. It has never been vacant for more than a couple of months. To the negative, I have a property management company running it and they charge 8% per month. This, admittedly, is because I am not very handy with repairs and other maintenance work. The repairs I've had done seem to be pretty cost effective.

It was purchased in 2006 as an owner occupied at 30yr/5.875%. That is also the current rate because I have yet to refinance given the requirements for doing so on an investment property.I know the 30 year isn't very "mustachian". It was my first house and I made a subpar decision as a result of wanting to get out of my parents house after college. The condo is in my name and my wife and I have a primary about 20 minutes away in a pretty nice neighborhood. Anyway...

Just trying to learn what other people have done in a situation like this. Most of the heloc options I see would fail to yield the cash needed to pay off the rental.

Thanks for reading. I'm looking forward to more meaningful contributions in the future.

[Cwadda]

Is it losing money each month? If yes, then you should sell it. What is your monthly cashflow?

[sokoloff]

In your other thread, you said it "more or less breaks even every month". That's a pretty wide range (after accounting for vacancies, repairs, and depreciation? That's great; only on months where it's rented and nothing breaks? That's a lot less great.)

If you are confident in the long-term prospects of the area (Kentucky has some rising areas and some, well, "not rising" areas), I'd keep the rental as it forms a stable base for you to expand your rental empire from. The key is getting and keeping good tenants and faithfully raising the rent each year. This is something that a lot of novice landlords ignore because "what's another $25/mo vs the chance of a good tenant moving out?" Then, 10 years later, they're missing $3K per year (25 * 10 * 12).

If you're in a declining area of Kentucky, you don't want the "extra" exposure to housing in the area, IMO.

The other thing to consider is dumping the property management company and DIYing it. That's not for everyone, but right now, the property management company is making more profit on the condo than you are. DIYing it becomes a second job for you, but will more than double the cashflow from the property.

[gspeicher]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

[gspeicher]

In your other thread, you said it "more or less breaks even every month". That's a pretty wide range (after accounting for vacancies, repairs, and depreciation? That's great; only on months where it's rented and nothing breaks? That's a lot less great.)

If you are confident in the long-term prospects of the area (Kentucky has some rising areas and some, well, "not rising" areas), I'd keep the rental as it forms a stable base for you to expand your rental empire from. The key is getting and keeping good tenants and faithfully raising the rent each year. This is something that a lot of novice landlords ignore because "what's another $25/mo vs the chance of a good tenant moving out?" Then, 10 years later, they're missing $3K per year (25 * 10 * 12).

If you're in a declining area of Kentucky, you don't want the "extra" exposure to housing in the area, IMO.

The other thing to consider is dumping the property management company and DIYing it. That's not for everyone, but right now, the property management company is making more profit on the condo than you are. DIYing it becomes a second job for you, but will more than double the cashflow from the property.

All great points. I'm in Louisville and both of our homes (primary and investment) are in pretty nice areas in Louisville. I'm confident in its prospects. From what I can surmise, our rent is already above the market average, so I have had some hesitation about bumping it. I guess I'll look into that the next time I turn it.

But to your point, there are months in which I lose since the margin is so tight, but that is offset by the principal reduction in most cases.

[gspeicher]

I guess the ultimate question is do any of you know of a product that has pretty lax LTV requirements for solid income/800+ credit score borrowers? I'd do execute it on the primary residence since the rate will be much lower (I think).

[dandarc]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

You probably have negative cash-flow if it only makes $17 in a good month (not vacant, no repairs, rent paid on time).  Have you actually inquired at a bank or mortgage broker about refinancing?  I'm curious what these "requirements for refinancing on an investment property" are that you can't meet?  Refinancing on a new 30 year term at 4-5% will probably reduce your payment by $200-300 per month.  Mostly due to spreading the balance out over more years, but a lower interest rate helps too.

[gspeicher]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

You probably have negative cash-flow if it only makes $17 in a good month (not vacant, no repairs, rent paid on time).  Have you actually inquired at a bank or mortgage broker about refinancing?  I'm curious what these "requirements for refinancing on an investment property" are that you can't meet?  Refinancing on a new 30 year term at 4-5% will probably reduce your payment by $200-300 per month.  Mostly due to spreading the balance out over more years, but a lower interest rate helps too.

Much appreciated. It's not because I can't meet them.

I have made a couple of inquiries. I'd just rather not hit my pocketbook - even though it wouldn't be a ton - to meet the LTV requirement on an investment property when the rate will be close to the same (from what my inquiries have suggested). That requirement is somewhere between 75-80% which I've already met if I go by Zillow, but I think that is high.  I know it's a cost-benefit analysis and you're right, I'm not making money, but I think that would turn around if I could get some things restructured.

[Cwadda]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

It is losing money...1 month vacant per year is $105/month. You're not accounting for repairs and CapEx either. And what happens if and when there's a special assessment for the HOA?

[gspeicher]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

It is losing money...1 month vacant per year is $105/month. You're not accounting for repairs and CapEx either. And what happens if and when there's a special assessment for the HOA?

Yeah. Repairs are rare but that means nothing to the future.

So options to increase the margin are:
1) Refinance the property
2) Get rid of the HOA
3) Increase rent (which I find unlikely since it is already above fair rental ratE)
4) Sell

Assuming I could get 145k, would you recommend a sale and move onto something else?

[Cwadda]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

It is losing money...1 month vacant per year is $105/month. You're not accounting for repairs and CapEx either. And what happens if and when there's a special assessment for the HOA?

Yeah. Repairs are rare but that means nothing to the future.

So options to increase the margin are:
1) Refinance the property
2) Get rid of the HOA
3) Increase rent (which I find unlikely since it is already above fair rental ratE)
4) Sell

Assuming I could get 145k, would you recommend a sale and move onto something else?

1) Discuss with a trusted mortgage broker or bank about interest rates. See what they have to offer and how much refi costs would be.
2) Get rid of HOA? Do you mean separating yourself from the condo association? Is this even possible? How many units are in the association?
3) I wouldn't recommend this either, especially if you already have a tenant in place.
4) Could be an option, especially if FSBO, but I'd look at #1 first.

[gspeicher]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

It is losing money...1 month vacant per year is $105/month. You're not accounting for repairs and CapEx either. And what happens if and when there's a special assessment for the HOA?

Yeah. Repairs are rare but that means nothing to the future.

So options to increase the margin are:
1) Refinance the property
2) Get rid of the HOA
3) Increase rent (which I find unlikely since it is already above fair rental ratE)
4) Sell

Assuming I could get 145k, would you recommend a sale and move onto something else?

1) Discuss with a trusted mortgage broker or bank about interest rates. See what they have to offer and how much refi costs would be.
2) Get rid of HOA? Do you mean separating yourself from the condo association? Is this even possible? How many units are in the association?
3) I wouldn't recommend this either, especially if you already have a tenant in place.
4) Could be an option, especially if FSBO, but I'd look at #1 first.

I typed faster than my brain was working. I meant get rid of the property management company. My bad.

Alright, thanks for your input.

[Cwadda]

Thanks for the response.

It isn't losing money. PITI is $933 with a $200 HOA fee and $100 in management fees. BUT...it isn't exactly making money either. I don't think I need to sell it, just looking for options to increase the cash flow.

It is losing money...1 month vacant per year is $105/month. You're not accounting for repairs and CapEx either. And what happens if and when there's a special assessment for the HOA?

Yeah. Repairs are rare but that means nothing to the future.

So options to increase the margin are:
1) Refinance the property
2) Get rid of the HOA
3) Increase rent (which I find unlikely since it is already above fair rental ratE)
4) Sell

Assuming I could get 145k, would you recommend a sale and move onto something else?

1) Discuss with a trusted mortgage broker or bank about interest rates. See what they have to offer and how much refi costs would be.
2) Get rid of HOA? Do you mean separating yourself from the condo association? Is this even possible? How many units are in the association?
3) I wouldn't recommend this either, especially if you already have a tenant in place.
4) Could be an option, especially if FSBO, but I'd look at #1 first.

I typed faster than my brain was working. I meant get rid of the property management company. My bad.

Alright, thanks for your input.

That's viable if you're comfortable with landlording. It'd bring you more to a break-even point.
But it'd still be very important to know how big the HOA is and consider how "healthy" it is. A 10 unit HOA is very different than a 500 unit HOA.

[gspeicher]

I would estimate about 200 units.

[gspeicher]

So here's another question.

If I accessed my primary's equity using a HELOC to pay off the condo (~3% APR) right now, how fearful should I be of the impending rise in interest rates? Should I go with an home equity installment loan instead to get the fixed rate (4.8%)? I know this is hard to answer, but now I am just looking to justify keeping the condo for no other reason than thinking it can eventually be worth keeping. By my calcs, I lost about $850 last year, but it helps come tax time too. Just kind of lost here. Can you all tell I haven't been involved enough with this? Sigh.

[gspeicher]

That also assumes that I could even get enough out of the primary to bother with it....

[sokoloff]

IMO (which is worthless), interest rates are likely to remain low (among historical ranges) for the next decade. I wouldn't fear a sudden rise in interest rates; if you did get a sudden rise in interest rates, that would harm property values of course which might be more of a concern than the monthly cashflow figures.

I hope you're trying to optimize cashflow and not trying to avoid going broke. (If you're flying that close to the sun, it's probably wise to dump the property. If you're just looking to optimize, that makes total rational sense, of course.)

[Cwadda]

So here's another question.

If I accessed my primary's equity using a HELOC to pay off the condo (~3% APR) right now, how fearful should I be of the impending rise in interest rates? Should I go with an home equity installment loan instead to get the fixed rate (4.8%)? I know this is hard to answer, but now I am just looking to justify keeping the condo for no other reason than thinking it can eventually be worth keeping. By my calcs, I lost about $850 last year, but it helps come tax time too. Just kind of lost here. Can you all tell I haven't been involved enough with this? Sigh.

I'd advise against using a HELOC to pay off the condo. This would be robbing Peter to pay Paul, at a variable interest rate (a HELOC has the the potential to go up to something crazy, like 15% we're talking).

How about just doing a refinance on the condo itself? You should be able to get between a 3.5% and 4.0% interest rate. Check with your local lenders/credit union.

[Cwadda]

I'm going to attach a calculator that may help you to make some decisions. Fill out all the values in the spreadsheet. If cash-on-cash return for the property is anywhere 7% or below, you're probably better off selling and putting the money into the market.

[srad]

If you are keeping the property this is an easy answer.  You need a new 30 year loan.  Rates right now are in the low 4's for investment property.  A 4.25% 30 year fixed loan on a 109k balance reduces your PI payment to $536.21.  That is almost $400 a month savings or just about 5k a year, that is a big deal... 

If you have four or less properties the LTV will need to be 80, and if its been rented for the last 2 years you get to include all the rent in your income, less than 2 years you get to take 75% of the rent as income (this is for your DTI calculation and i'm pretty sure its 2 years, could just be 1 too).

And also, you need to drop the PM and manage it yourself.  I have 8 doors that I self manage and i work a full time 40+ hour a week job.  Its very easy, the amount of calls i get are maybe a half dozen a year.  Majority of issues are either dead appliances (very easy fix, i love shopping), a leaky pipe/toilet/faucet, or a clogged drain.  I'll try and fix most of them myself, but if i can't do it or i just don't want to, i'll just put a call into a local plumber and have them fix it.  It can costs up to $180 for a leak\clog , but i only pay that $180 once.  That PM fee you are paying,,, that's every month, for life.   I never get when people tell me they have one rental in the same town they live in and they hire a property manager. You are giving away so much money for someone to collect YOUR check and call a plumber once a year.

[gspeicher]

Thanks for all of your responses guys. Tremendously helpful.

To address sokoloff, we are definitely not trying to avoid going broke. We are in a pretty good spot right now (good bit of savings/investment), no debt, etc.

Sounds like attempting a new loan is the answer. DTI is definitely not an issue as we are a 200k+ family with no consumer debt. I guess I just need to man up and put the cash down to meet the LTV limitation. Would any of you happen to have any references for one of these 4% investment property loans?

[srad]

I used Consumer Direct for a cashout refi on one of my properties a little less than a year ago.  At the time, they had the best rates and some of the cheapest closing costs among the many companies I looked at.  And I looked at a lot of companies...    You should be pretty close to having the 80 ltv, you need about 135k in value, Zillow usually is within 10%, especially for condos.  Those are easy to comp. 

You might not be able to wrap in your closing costs,  but if you can, i'd suggest you do.  Financing 3k over 30 years is like an additional $15 a month, which is peanuts.  Then take that 3k you would of paid at closing and put it in an IRA or something...  Even with how corrupt wall street is, that IRA should return more than 15 a month to you over the course of 30 years.  For the exact numbers, financing 3k for 30 years will cost you $2156 in interest,  so as long as the IRA doubles, just once, you come out ahead.