Author Topic: Need help with investment property  (Read 6469 times)

Marcpereiraabc1234

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Need help with investment property
« on: January 25, 2015, 05:34:46 PM »
Hi Savy Team,
I have a financial scenario that I don't know how to proceed.
My previous house is being rented now and I don't know if I should keep it being rented or to sell it.
Here is the breakdown:
House purchased for $784,000.  Improvement 20,000. 
It was purchased in 2005. The current loan was a 7 year ARM. The house rate today is Libor 6 months + index 2.5   Today's rate is at 3.125%. This was a 7 year interest only loan at first.
I have been paying all of these years (almost 10)
The balance is 535,000. When I bought this property I gave 210,000 down payment.

Currently the payment is 2900$ + 700 taxes monthly+ 50 insurance.  (Monthly)
The loan break down is $ 1600 principal and $1300 interest.
The problem is that the money that I collect from rent is only $2900. The taxes and insurance, I need to pay from my own paycheck every month.

What should I do? Keep house with same ARM? Refinance? sell?
The ARM loan is a 6 months Libor. With a Max increase cap of 1% a year.
The current loan balance is 535,000. We think with the house market improvement we can get around 700,000. ( minus sales commission. we hope)

We have a great tenant for about 1 1/5 year with a lease to expire in May. We haven't raised the rent since it has been rented in 2013.

Thanks for any feedback that I can get from this discussion group. Regards,

waltworks

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Re: Need help with investment property
« Reply #1 on: January 25, 2015, 05:41:45 PM »
Sell immediately. You have equity tied up in a negative cash flow situation. Yank that equity and buy something productive with it, or pay off other debt, or stuff it under a mattress... anything is better than what you're doing.

I think this might be the market value to rent ratio winner for the year thus far, too. $784k/2.9k = .36% rule!

-W

clarkfan1979

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Re: Need help with investment property
« Reply #2 on: January 25, 2015, 06:06:52 PM »
How much are the taxes and insurance?

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #3 on: January 25, 2015, 06:41:17 PM »
7,000 taxes. Which includes melroose fee which will end in five years.
Insurance is 550./year

the house is only 10 years old. Great location near middle school, elementary and junior high. 

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #4 on: January 25, 2015, 06:56:55 PM »
A few things about this property
I put 210,000 down payment
30,000 improvements. To finish backyard
2,400 x 12x 8 years ( interest only loan)
House is currently rented. Rent  $2,900
I manage myself the property. And I have fixed so far the washer machine (bad switch) and garbage disposal (replaced $80). I feel lucky that I could do the work myself. 
Currently I am required to send to bank $2950 month
Insurance (550) and taxes (7000) I pay annually

My concern is that the loan is an ARM and payment can go higher eventually.

Another Reader

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Re: Need help with investment property
« Reply #5 on: January 25, 2015, 07:35:01 PM »
Since you mention Mello Roos, you must be in California.  If the house is located in an area where it is still below the last market peak, my guess is that the value is not going to appreciate much in the near future.  The best market areas are at or above the 2005-2006 market peaks.  You can continue to lose money every month in the hopes the value comes back, or you can sell.  In your shoes, I would give serious thought to selling.  Your capital loss should offset some or all of the depreciation recapture.

If you decide to keep the house, look into refinancing it.  There have been some very favorable rates recently, although they have moved up a bit.  It might be worth filing an application for a 5/1 ARM at the place with the best rate and terms, but not lock the rate until it makes sense.  However, I again caution you to revaluate the prospects for appreciation realistically if that is your reason for holding.

Sorry, Waltworks, my neighborhood has that rent as a percentage of value beat.  Try 0.33 to 0.35 percent.  I could get a little more than one percent of what I paid for it over 25 years ago. 

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #6 on: January 25, 2015, 08:10:59 PM »
Yes, the property is in Northern California. Yes, the reason holding on property is to hopefully get some of the money that I have put in.

realtor sales commission is 5%.

What I am facing is LTV to meet the refinance requirements and a good rate for an investiment property. Does it matter that in August/2015, It is going to be two years that I left this house and started to rent (trying to understand the 1031 exchange rules). However I don't think it applies to me since I don't have any profit.

The value in 2013 was around $530,000
The estimate value in 2015 is around 700,000
I am glad I didn't sell or shortsale this property in 2013.

Another Reader

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Re: Need help with investment property
« Reply #7 on: January 25, 2015, 08:45:36 PM »
In your shoes, I would look at how long it would take me to get to a point where I would be happy with the result of selling.  You have $784k plus $30k of improvements in the property.  Total cost is $814k.  You need to pay the real estate agent 5 percent, so dividing $814k by 0.95 gives you just under $857k.  Adding your share of closing costs and repairs probably means you would have to sell for $865k to "break even."  The property is worth $700k now.

Sometimes it's better to realize a loss if the net equity from a sale can be put to work elsewhere at a better rate of return.  Getting rid of the bleeding is also a benefit.  My guess is you are in an outlying part of the Bay Area or up towards Sacramento, based on the numbers.  Realistically, is demand for your location going to grow fast enough to get you back to "break even" in a reasonable amount of time?  If the market softens, are you in an area that will drop in value early?  If the answer to the first question is no and to the second question is yes, then you may be better off selling now and reinvesting the proceeds elsewhere.

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #8 on: January 25, 2015, 09:16:08 PM »
First I would like to thank for all responses. I truly respect the advice and opinions.

It is hard to make the right financial moves. I put a large down payment and it is hard to let the house go.

The area where the property is located is in Sonoma County near the 101 freeway. The city has grown tremendously during the past two years. New shopping mall has been built. There is a ongoing project for the smart train to be built. This year property value is estimated to grow 7%. Is it going to grow? I don't really know.

Trying to figure out the future and the economy is giving me a headache. Would a CPA tax guy be able to determine when to less and take the loss? Would the loss help me on lowering my tax rate?

Is it too crazy to think of holding the property for another 21 years until it gets paid off. ? I can only dream of this house being paid off.

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #9 on: January 26, 2015, 09:42:01 PM »
Is it too crazy to think of holding the property for another 21 years until it gets paid off. ? I can only dream of this house being paid off.

When I get the rent check I pay the principal and interest. My negative cash flow is about 700$

1650 principal x 12. It is over 17,000 reducing my mortgage balance. Then I have to pay property tax which takes profit away. Am I missing anything?

jnc

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Re: Need help with investment property
« Reply #10 on: January 27, 2015, 04:17:30 AM »
I am not familiar with rents in Sonoma county, but did you check out rent comparables to see if you could rent out your house for higher? That would help stem the tide a bit.

MJB MPLS

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Re: Need help with investment property
« Reply #11 on: January 27, 2015, 10:54:09 AM »
Sell immediately and find more profitable rental SFHs in the 125-150k range, with the capital you'll recover. Charge 1,300 rent on the new ones.

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #12 on: January 31, 2015, 12:39:11 PM »
Any more ideas? I am still not sure how to proceed.

waltworks

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Re: Need help with investment property
« Reply #13 on: January 31, 2015, 12:44:38 PM »
Sell, for christ's sake.

_W

Markywalberg

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Re: Need help with investment property
« Reply #14 on: January 31, 2015, 05:00:23 PM »
I would sell you are losing money when you should be making it and if that interest rate moves up at all you start to lose alot more money. I looks like you should have paid off more of the principal by now so that the interest is half of what it is but just a bad situation and ARM's are only make the risk with this investment to high

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #15 on: January 31, 2015, 05:12:22 PM »
I was planning to refinance out of the ARM into a fix rate and back to 30 years. With this move, I was hoping to drop the requirement monthly payment.
Then I can hold on on the property for many more years and wait for real estate appreciation.

I am health so I can keep up with the management of property. And property is only 10 years old so maintenance is low.

The house is on a great neighborhood and near great school.

Does anyone back me up on this move?


Marcpereiraabc1234

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Re: Need help with investment property
« Reply #16 on: May 30, 2015, 11:13:29 PM »
I listed the house for 740k but no offers. It was on the market for 33 days.
I rented the house for 3,400/ month again. I signed 1 year lease and tenant paid 12 months advance with a total received 40,800 + 5k deposit
Was this an okay move to buy me more time to prices to go up?


PI is 2,915/month 500 property tax, 50 house insurance. House gets pay off in 20 more years.
60% goes to Principal. 40 goes to Interest.

Feedback/ opinion Anyone?

Bearded Man

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Re: Need help with investment property
« Reply #17 on: May 30, 2015, 11:38:30 PM »
I agree with the other readers who said to sell it. Another Reader had a good point in that it would even be better to sell at a loss and put the equity left to use to actually make money rather than watching it bleed out every month.

waltworks

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Re: Need help with investment property
« Reply #18 on: May 30, 2015, 11:50:20 PM »
You already ignored our feedback, dude. But, since you can't sell it for a year now, I say: sell it in a year. Or potentially hand your tenant his money back and sell it.

-W

fishnfool

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Re: Need help with investment property
« Reply #19 on: May 31, 2015, 02:40:27 PM »
If I were in your shoes I'd be looking to either get $3750 a month rent or unload this property as fast as possible!

fishnfool

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Re: Need help with investment property
« Reply #20 on: May 31, 2015, 02:50:13 PM »
I was planning to refinance out of the ARM into a fix rate and back to 30 years. With this move, I was hoping to drop the requirement monthly payment.
Then I can hold on on the property for many more years and wait for real estate appreciation.

I am health so I can keep up with the management of property. And property is only 10 years old so maintenance is low.

The house is on a great neighborhood and near great school.

Does anyone back me up on this move?
A refi to 30 years would help, but you'll still be in the negative according to my estimate, would lower your current payment by $450 a mo depending on 30 yr rate you'll get for a investment property, maybe a little more or less. But still negative unless you can raise the rent enough to break even?

Marcpereiraabc1234

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Re: Need help with investment property
« Reply #21 on: May 31, 2015, 03:06:13 PM »
Thanks all for reviewing this email.
My numbers this year are:
526,000 balance on the loan
+~1500*12=18,000 principal reduction after 6/1/2016 ( year later)

Next summer I plan to put up for sale next year.

I am gambling with the interest rates because I don't want to keep  the house which does not make me  any profits. Refi will cost me money and I think it is not necessary if I sell within a year.

I am new with investing and buying this house was not a good idea since I paid too much.


thd7t

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Re: Need help with investment property
« Reply #22 on: June 03, 2015, 10:29:26 AM »
You seem to be really desperate not to sell this house.  Why don't you sell it.  You had it on the market for a month and then pulled it, but don't say why.  Why are you keeping the house?

sokoloff

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Re: Need help with investment property
« Reply #23 on: June 03, 2015, 08:08:08 PM »
IMO, you *do* have a profit since the time it was put in service as a rental property, so you need to be concerned with a 1031 exchange rules if you go down that route.

I'm going to go a little against the tide here and suggest that as long as you can swing the cash flow, you have a substantially profitable property here. You also have a second job as a landlord and property manager, but your expenses are taxes, repairs, and the interest portion of the mortgage, and the rent is handily covering those. The principal payment is not an expense, but rather is forced investing. The (non-cash) depreciation should help ease the income side of things.

With "great tenants", I'd keep the house, against as long as you can stand the negative cashflow. If your cashflow is negative by $200 per month, but you're paying off $1500-1750 of principal each month (depending on which number of yours I use) and getting about $16K in depreciation expenses, you're showing a cash loss of $2400/year, a tax profit of around $8K per year while getting around $20K of principal paid off, while having maybe $150K in equity tied up. That's far from a massive losing situation.

I'm not sure I'd rush into buying into that situation, but given that you're already here, already have a good tenant in place, can swing a couple hundred a month in negative cashflow, and quite obviously don't want to sell, I think you're fine to keep it.
« Last Edit: June 03, 2015, 08:11:30 PM by sokoloff »

anbeha5754

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Re: Need help with investment property
« Reply #24 on: June 05, 2015, 06:01:28 PM »
IMO, you *do* have a profit since the time it was put in service as a rental property, so you need to be concerned with a 1031 exchange rules if you go down that route.

I'm going to go a little against the tide here and suggest that as long as you can swing the cash flow, you have a substantially profitable property here. You also have a second job as a landlord and property manager, but your expenses are taxes, repairs, and the interest portion of the mortgage, and the rent is handily covering those. The principal payment is not an expense, but rather is forced investing. The (non-cash) depreciation should help ease the income side of things.

With "great tenants", I'd keep the house, against as long as you can stand the negative cashflow. If your cashflow is negative by $200 per month, but you're paying off $1500-1750 of principal each month (depending on which number of yours I use) and getting about $16K in depreciation expenses, you're showing a cash loss of $2400/year, a tax profit of around $8K per year while getting around $20K of principal paid off, while having maybe $150K in equity tied up. That's far from a massive losing situation.

I'm not sure I'd rush into buying into that situation, but given that you're already here, already have a good tenant in place, can swing a couple hundred a month in negative cashflow, and quite obviously don't want to sell, I think you're fine to keep it.

I completely agree with the above comments. If you can afford to keep the house, which it appears that you can comfortably eat the negative cash flow, your cash flow situation is obviously not ideal, but it is not that bad as noted with the above comments.

Check out Dr. David Schumacher's Buy & Hold Forever, he had negative cash flow on a few cali properties and could afford it because he knew appreciation would pay off 20 years down the road. Most people can't afford negative cash flow for 10 years, but if you can, the appreciation you gain many years down the road should offset the years of negative cash flow.

just an example - -300mo x 12 is 3600 negative cash flow annually, just for the sake of easy numbers, -3600 x 15 years = 54,000....and 15 years later your property is worth over a million, a few hundred thousand more than you paid.....eat the negative cash flow only if you can afford it. It will pay off in California.

Your house is in Northern Cali and I'd imagine it would appreciate along with everything else in cali. Think of the value in 15-20 years. California real estate has always been expensive...the appreciation has always been high.

You may want to consider getting a fixed rate though if you intend on  holding forever and reaping the appreciation rewards many years down the road.