Out of State Owner (To refinance, accelerate payments, or sell?)

[oneporter]

We purchased a home in South Carolina 3 years back for 138k.  We've moved out of state and began renting the house last year for 1200/month.  The mortgage balance is $128k.  Last year we paid $1k in property tax as a primary residence.  This year we should pay closer to $4k.  The mortgage payment should increase to $1150/month to cover the property tax increase.  For now the management costs are zero.  As I understand it, paying a property manager would be around 10% of rent.

Home Value 142k

Mortgage 128k @ 4.5% 30 y fixed, 27 y remaining
Insurance 1.1k/year
Taxes ~4k/year
I assume ~1% maintenance 1.5k/year

Rent is $1200/month

I'd like to determine if it's worth it to pay the loan off early or sell it.  Regardless of whether we refinance, we'll pay the the loan off in 15 years or less.  So, it seems like the difference is $1600 less in interest / year and a higher obligation to pay (2.6k / year to begin with).

If we leave it alone, we pay $689 in mortgage ($204 in principal), $94 in insurance, $350 in taxes, and $125 in maintenance =  $1258 / month = $15096 / year.

With 100% occupancy, we pay $696 / year for $2.5k in principal
With 70% occupancy, we pay $5k / year
With 50% occupancy, we pay $7.9k / year

If we refinance to 15 year 3.29%, we pay $901 in mortgage, all else equal = $1470 / month = $17640 / year

With 100% occupancy, we pay 3.2k / year for 6.7k in principal
With 70% occupancy, we pay 7.5k / year (by year 5, 7.65k in principal paid)
With 50% occupancy, we pay 10.4k / year

Assume the mortgage is completely paid and the house can be sold for 142k.  If we assume ~1% maintenance/year (-1.5k), taxes (-4k), insurance (-1.1k), and rent (+14.4k). 

At 100% occupancy, we make 7.8k, which is a 5.5% yield.
At 70% occupancy, we make 3.48k, which is a 2.45% yield.
At 50% occupancy, we make 0.6k, which is a 0.4% yield.

I think better returns can be gained by contributing to a stock market index.  Though this provides an income outside of the stock market, which is nice.  What else should I consider?  How can I better analyze this situation? 

We've been lucky so far with 100% occupancy, but we are unsure of what occupancy rate to expect in the long term.  Do you guys have any guidance there?

[salmp01]

It doesn't make sense to own this as a rental.  I'd sell it now and take your profit.

[Undecided]

What about appreciation expectations on this highly-leveraged investment?

[oneporter]

Zillow expects a 1.7% increase in the area next year ... did not expect the value to be <4%... =\

[Another Reader]

Would you go into the market today and select this property to buy as a rental?  It would not appeal to me, because the rent is not at least one percent of the value.  If it does not appeal to you, and if there is no other compelling reason to keep it such as rapid appreciation and/or increasing rents, then I would sell.  You won't come out with much, but you won't lose much if anything.

Pay no attention to Zillow.  Their models are faulty.  The Z-estimates are generally worthless, as are their predictions.  Pay attention to what is actually happening in the market now.  The fact that the property went up only $4,000 in three years is not encouraging.  If the market is balanced and there is no upward pressure on rents and values, I would sell.

[salmp01]

What about appreciation expectations on this highly-leveraged investment?

If you knew for sure that this would appreciate 5%/year then it would be a good investment.  Unfortunately, I don’t think any of us have a way to determine this.   If this property were to lose 5%/year you could end up losing significantly.   I have always purchased rentals (in locations that work for me) based on cash flow.  This property will not cash flow so I’d sell it and buy one that does.

[sassy1234]

I am in the exact same position. 

We bought our house for 142,000 in 2008.  I had to move for a out of state job in 2010. Yikes!  We have been renting it out since, have similar returns, and have been trying to decide if we should keep it or not. 

Rent:
First 12 months (first renter): $1275 
Next 18 months (second renter): $1050
Next 3 years (third renter: 5 months into 3 year lease): $1225  These renters might stay a 4th year, and I will increase the rent by $100 for that last year. 

The second renter screwed us and we lost $1,500.   

At first, we were just buying ourselves some time.  But then, we started getting serious about early retirement, so we are considering keeping it and paying it off early.  In 15 years, we will have some nice monthly income. 

People on this forum suggested that we sell it, as we are below the 1%.  1225/142,000 = .86 < 1% or in 2 1/2 years 1325/142,000 = .93 (assumption) 

However, I spoke with my accountant about it and he said that it is not a bad deal.  He said that we are not professional landlords, so we can have slightly lower standards.  It is a nice write off, and it is nice financial diversification.  We still are still deciding on what to do.  It is not an easy decision.