Author Topic: Please help with refinancing a rental  (Read 5349 times)

Garlic Goddess

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Please help with refinancing a rental
« on: March 21, 2013, 11:18:20 AM »
Hi!  I would like some help with selecting a lender to re-finance a rental property we own.  There are so many options out there, I felt overwhelmed when I started searching, so I am asking the expert Mustachians!  Here is the background.  My husband and I bought the property in 2006 or 2007 when anyone could get a mortgage.  We purchased it for zero down and still have our original loans.  One is an 80 percent loan at 6.25% and one is a 20 percent loan at 8.75% (ouch!).  We have never missed a payment and have good credit... Hubby's is about a 780 I think and mine is a 720. We originally lived in the house and never intended it to be a rental.  We are federal employees and move frequently and were unable to sell when we wanted to, as the market of course dropped drastically.  We have rented it continuously, as it is in a kick-ass location in the southwestern US, next to a huge city park with hiking trails and mountains views, half a mile from a university, one mile from the downtown arts district and bars, very close to federal public lands, has an amazing climate, etc.  We hope to live there again someday or retire there, so we no longer want to sell it.  The problem is we pay out about $3,000 a year to keep the place since the rent does not cover the cost of the mortgage, taxes,  property manager, and upkeep.  We want to keep the property managers because they are great and make it a lot easier for us since we now live across the country.  If we can lower our payment a few hundred dollars a month, it would be awesome.  We aren't concerned if we do not make any money... We would just like not to lose money.  The place rents for 795 a month and we receive 699 a month after management fees.  We owe around $124,000 and it is hopefully still worth that, but could potentially be worth 10k less.  If we refinance, we would like a 20 year loan ( they don't have 25 year terms do they?) so we do not lose all the years we have been paying.  We also do not want to pay for the appraisal in case we get screwed regarding property value.  If we have to pay closing costs we will, but I don't know what all of our options are.  As a side note, Mr. Money Mustache would be happy to know that my husband and I did a shit-ton of repairs on the house ourselves, from tiling the bathrooms, installing new light fixtures and sinks, installing hardwood floors in the living room and bedrooms, landscaping, painting, etc.  We didn't pay for any of this ourselves since we asked for gift cards to Lowes and Home Depot for our wedding presents.  We did hire a plumber because my husband curses like a crazy person when performing serious plumbing, and although I have no issue with swearing, if its more than 100 curse words a minute, it's not very pleasant.  Ha!  Anyway, who has some good advice for us?

Kazimieras

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Re: Please help with refinancing a rental
« Reply #1 on: March 21, 2013, 01:07:31 PM »
Have you considered.... since it has a negative cash flow (and the equity buildup isn't even sufficient to offset the cash put in), why not just sell it, take the loss and save yourself the headache of owning a property that you're paying someone else to live in?

I would only consider holding onto this piece if you feel the area has been severely depressed in value (much more than it should) and will bounce back in the next few years.

Garlic Goddess

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Re: Please help with refinancing a rental
« Reply #2 on: March 21, 2013, 01:48:34 PM »
Unfortunately, selling is not an option.  We tried to sell it the entire year of 2009 and could not.  We have since rented it and the current renter is a long term tenant who takes excellent care of the property.    ( We had two different short term renters prior to this guy that were great too). 

It is very difficult to rent a home that is for sale... No one wants to deal with prospective buyers stomping around and the possibility of having to move soon.  We cannot have the house vacant since the mortgage needs to be paid.  I just checked our statements, and we actually owe $122,000.  Having checked listings in the area, it is more than likely worth that... but since I do not have an official appraisal, I cannot say for sure.  The market is better now than it was in 2009, but by the time we pay realtor fees and such, it may be better to hold onto the property at least another five years.  The town has been voted numerous times as one of the best small towns to live in, so there is  a possibility the market could increase again in this area. 

DoubleDown

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Re: Please help with refinancing a rental
« Reply #3 on: March 21, 2013, 02:51:46 PM »

Unfortunately, selling is not an option.  We tried to sell it the entire year of 2009 and could not. 

Any house will sell at any time, at the right price. If it didn't sell then, it was overpriced for the local market at the time. You should try again, pricing it appropriately for your current market.

Unless you really, strongly believe you will gain more in appreciation than you will lose on a monthly basis holding it, you should get rid of it. And that belief should be backed up by some numbers: Calculate what you think you will gain in appreciation each year, calculate what you lose each year holding it. If the amount you are losing is more than you will get out of appreciation, get rid of it. Otherwise you are just throwing good money after bad, as they say. And even if you think it will appreciate more than you are losing, realize that appreciation is speculative (it might not go as you hoped). A "possibility the market could increase again in this area" is NOT a strong enough basis to keep this money-losing rental IMO.

I will add one last thing: All the reasons you cited as to selling being "impossible" will always exist, in the future and now. You will still have realtor fees, vacancy while you list the house (or having a cooperative tenant with showings), and so on. Does continuing to lose money every month only to inevitably face these things down the road make the best sense?

Garlic Goddess

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Re: Please help with refinancing a rental
« Reply #4 on: March 21, 2013, 04:07:11 PM »
I understand the advice regarding selling the home, and maybe you are right. But, if I were to refinance, then I wouldn't be taking a loss every year.  I was hoping for names of companies other people have used to refinance and details about the requirements necessary. 

I guess my big worry is what if we go to sell the house and we:
1) lose my good tenant and can't find another one who wants to rent a house that is for sale...  I Do not want to be in a situation where I have a late payment or short sale...  3 and a half months of mortgage payments are what I lose in a year of renting the house and if its vacant longer than that, than we are really screwed!
2) after realtors fees, lose $10k on the house and have to pay that at once to get out of the mortgage... It would suck to take that out of our retirement accounts when it is possible we could relocate there ourselves within 3 years and have the same loss, but still own the house

If we could refinance and lower our payments, then at least we wouldn't be losing money.  We are actively looking for jobs in the area because we would love to move back and live in the house, but very few jobs come out since it is a very small town.  It is likely that one of us could find a job there within the next 3 to 5 years, so we are not too anxious to sell.  Maybe I am being too sentimental or hopeful, but I do not want to give up on living there yet, even if it isn't immediately.

Another Reader

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Re: Please help with refinancing a rental
« Reply #5 on: March 21, 2013, 08:12:12 PM »
Yours is a complicared situation because there are two loans and the house id now rented.  The loan in second position is probably worthless, and that lender might be less than cooperative in subordinating to a new first.  If the first is owned by Fannie Mae or Freddie Mac, you may qualify for a HARP refinance of the first.  Call the servicer of the first to see what your options are.

As a rental investment, this is not a very good one.  Your rent is too low to make any kind of decent return.  The only reason not to sell is that you are moving back in relatively soon and it does not make sense to pay the selling expenses and bring additional cash to the table for the current house only to incur buying expenses when you move back.

Seeking the Brass Ring

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Re: Please help with refinancing a rental
« Reply #6 on: March 24, 2013, 07:14:49 AM »
Hi,

The real issue with the property is trying to maximize the cash flow.  This means you have to adjust your thinking away from what you would do with a primary residence.  I would not restrict myself to 20yr mortgages.  On the contrary you want to lower your monthly payment as much as possible.  This may mean looking for 30 or even 40 year terms or even 5 year ARM loans. 

Is there any way you can get 20% of the principle paid off?  If you can pay off the balance of the 8.75% loan you should be able to secure a 5% rate on the remainder.   What are the taxes and insurance?  Are there any other costs (garbage collection, sewer fees, etc)?

clifp

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Re: Please help with refinancing a rental
« Reply #7 on: March 24, 2013, 06:47:46 PM »
I think you are couple of steps ahead of yourself before looking for specific bank/mortgage broker recommendations.  But if you want to no harm in calling both Quicken Loans,and Loan Depot, plus if you are a member of federal credit union like Pen Fed, credit unions are generally competitive interest rate wise and often are more flexible.

I recommend this 3 step plan
  • Determine the property value
    Do some soul searching about to you really want to hang onto to the property
    Figure out your best options for refinancing

For appraisal, I look at the estimates from Zillow, Trulia, and the country assessor (i.e property tax statement.) I then would get a broker to give you their estimate. Your property manager can probably make a broker recommendation. If the estimate are withing 10K then simply averaging them is a good estimate.

Then you and your husband need to have a serious discussion of why you spending several thousand dollars a year to have a property thousand of miles away from where you live. (This is from somebody who has several properties 3000 miles from where I live). There is clearly an emotional component to this and that is both ok and understandable.  But try and put a price tag on it and make a trade off. For example if we didn't have the house we could save more for retirement, or we could have nice vacation.  On the con side the stress of having to sell the house while making mortgage payments is also understandable.   As an aside you absolutely can sell house with a renter, it happens every day, and I've bought them.  You will need to operate on a month to month leases, and probably need to cut his rent $50-100/month to compensate.  Even selling at loss is not the worse thing in the world, since it is a rental property (and not owner occupied) you can deduct the loss off of your taxes.

As Brass Ring said if there is anyway you can get the loan amount down to 75-80% of the value of the property that is by far the easiest option.  Don't overlook borrowing from parents and grandparents. Plenty of grandparents are rolling over there 4% to 5% CD from 5 years ago and loaning money to their grandkids at 4 to 5% looks a lot better than getting a 1% bank CD.

You should also check out the HARP(Home Affordable Refinance Program) http://www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx this is a program for people can't refinance because they are underwater, this would seem to apply to you.  Be prepared for loads of red tape and frustrations :(

Finally, you can look at playing hardball with your existing lender.  Tell them essentially that you have continued to pay despite being underwater, and having a negative cashflow. But your financial situation has changed and you can no longer do so.  Either they cut your mortgage payments or you will stop paying and make them do a short sale or even worse foreclosure. Now I am not saying you should actually do this, but threats can work.  Good luck.

salmp01

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Re: Please help with refinancing a rental
« Reply #8 on: March 25, 2013, 05:33:19 AM »
Quote
I guess my big worry is what if we go to sell the house and we:
1) lose my good tenant and can't find another one who wants to rent a house that is for sale...  I Do not want to be in a situation where I have a late payment or short sale...  3 and a half months of mortgage payments are what I lose in a year of renting the house and if its vacant longer than that, than we are really screwed!

Offer your current tenant the last monthís rent for free if they are willing to stay in the property while you try and sell.  If your tenant is interested this may be incentive for you to sell.   I have done this for one of the properties I own and it worked out great.  Iím not sure about this area but homes where I live have gone up significantly in the last few months.



richschmidt

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Re: Please help with refinancing a rental
« Reply #9 on: March 29, 2013, 07:01:41 AM »
We're in the process of refinancing a rental right now with a local bank. We fit under the HARP guidelines, so there's no appraisal. It's going to lower our monthly payment about $200/month, it looks like.

I shopped around - Quicken Loans, Lending Tree, etc - and this local bank gave us the best rate and overall deal. So go ahead and start calling or submitting requests. You were given the link above to the HARP website. You can check there if your mortgages will qualify. Or a lender can check for you.

I agree with the idea already given that you shouldn't limit yourself to a 20- or 25-year term. If your goal is lowering your payment, go ahead and get a 30-year or longer. You can always pay extra on the principal later if you want to pay it off more quickly.

arebelspy

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Re: Please help with refinancing a rental
« Reply #10 on: March 29, 2013, 08:55:37 AM »
Have you locked your rate? 

I'm curious because I just locked in a new purchase rate on a rental a week or so ago, and curious what you're seeing.
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richschmidt

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Re: Please help with refinancing a rental
« Reply #11 on: March 29, 2013, 09:15:21 AM »
Have you locked your rate? 

I'm curious because I just locked in a new purchase rate on a rental a week or so ago, and curious what you're seeing.

Who are you asking? Me?

We have. 4%. 30yr fixed.

AJ

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Re: Please help with refinancing a rental
« Reply #12 on: March 29, 2013, 11:38:24 AM »
We owe around $124,000 and it is hopefully still worth that, but could potentially be worth 10k less.  If we refinance, we would like a 20 year loan ( they don't have 25 year terms do they?) so we do not lose all the years we have been paying.  We also do not want to pay for the appraisal in case we get screwed regarding property value.  If we have to pay closing costs we will, but I don't know what all of our options are. 

I do not know of anywhere that will give you a 100% loan on an investment property - nor that wouldn't require some sort of appraisal or evaluation to determine what a property is worth.

However, if you can pay it down to 80% LTV, AIM mortgage is really easy to work with, and has KILLER rates. Plus, they do 25 year mortgages if that is really something you want. I can't recommend them highly enough, they have been completely on point for the two loans we've taken with them.

plus if you are a member of federal credit union like Pen Fed, credit unions are generally competitive interest rate wise and often are more flexible.

While PenFed is technically a credit union, they are massive and they get a LOT of mortgage volume because they have good rates and a couple of cool niche products (5yr 1.99% equity loan and 5/5 ARM). They have highly standardized procedures. If you need flexibility in your mortgage, they are not going to be amenable to that. Local credit unions might be better for that sort of thing - or a mortgage broker.

richschmidt

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Re: Please help with refinancing a rental
« Reply #13 on: April 01, 2013, 05:02:19 PM »
I do not know of anywhere that will give you a 100% loan on an investment property - nor that wouldn't require some sort of appraisal or evaluation to determine what a property is worth.

That's what the HARP program is for.  No appraisal required.  Our investment property that we're refinancing now isn't underwater... but the loan is probably 90+% of it's value.  I think even if it were underwater, it would still qualify.  That's kind of the point.

Garlic Goddess

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Re: Please help with refinancing a rental
« Reply #14 on: April 02, 2013, 07:28:40 AM »
Thanks for all of the great advice and info!  Here is an update.  We did look into HARP refinancing, which is the route we plan to take.  I contacted numerous lenders and am most likely going through US Bank.  Quicken Loans had good rates, but high settlement fees.  We also contacted our existing mortgage company, Green Tree, Nationstar, Wells Fargo, and M & T Bank, but many of these companies won't service your refinance if you are not already with them.  If all goes through as planned, we should have a 4.25 interest rate with closing costs and settlements fees around $3,200.  This only applies to the first loan, but if it goes through, the lender for our second loan states that we are eligible for another HARP program in which the second loan interest rate is changed to match the refinanced rate of the first loan.  I checked out the HARP website, and this appears correct and is called the Second Lien Modification Program.  If both of these HARP programs work for us, we will lower our costs by about $3,000 a year, which was our goal in order to break even. 

We are required to have an appraisal, even though it is the HARP program.  The lender contacts Freddie Mac, and if they do not feel comfortable giving a number to the lender, then you are required to get an actual appraisal.  Depending upon the lender, you can have an LTV of 105 or 125%, which helps out those who are under water.  But the good news is, the property value is a lot higher than I expected.... I think it will appraise in the low 130s.... high 120s at worst.  For our loan, it only has to appraise at 98,000 to go through, so we should be okay.  When we have refinanced and gotten the appraisal completed, I will write a final update for anyone who is interested.  I think I will check with one or two local credit unions today, and if nothing exciting happens with them, we will go with US Bank this week.

I have a friend that just refinanced their home through PenFed and is saving a ton of money and is really happy with them.  Looking at their website, most of their loans are not available for investment properties. Finding someone who does both HARP and investment properties (when they do not service your first loan) is slightly more difficult.

We are going to reevaluate in 5 years and sell at that time if we haven't moved back, or at least think more seriously about it.  We liked the idea of offering a free last month of rent to the existing tenant so they stick around during the selling process.  Thanks everyone.  I will keep checking for updates or questions

« Last Edit: April 02, 2013, 07:39:56 AM by Garlic Goddess »