Failing property on 15-year mortgage

[Cody Thayer]

Good morning everyone. So I’ll start by saying that I messed up!! I live in Nashville, TN but I bought my first rental property in Memphis, TN a year and some months ago.

My mortgage loan officer recommended a 15-year loan. Being new to this, it sounded good at the time. Estimated rent at the time had me breaking even on the property each month, and I make fairly decent money so I didn’t need the cash flow. The way my MLO pitched it was “put this on a 15 year, since you don’t need the cash flow. That way you’ll have 100% equity in 15 years and you can then bring in 100% cash flow versus just a few hundred dollars.” 

Well, now rent at this property has somehow dropped drastically (from $1,350 a month to now $1,095 per month). The kicker is that my original tenant is out, and now my property management company still cannot get this thing rented… so I’ve paid my mortgage of $1,350 for the past 3 months. But even if it does get rented out at $1,095… I don’t know if it’s worth it. 

So my question is- do I sell this property (valued at $170k and I owe $120k on it), and 1031 exchange it into a new property on a 30-year? Or do I just eat the $300/month once it’s rented and hope that rent goes back up in a year or so?

If you need any other details I’m happy to give them

[Mohammed Rahman]

Hey @Cody Thayer - I don't think you messed up at all. You earned a solid amount of cashflow for the years it was rented well, and made a big dent to the amount of equity you were able to gain from this. This is a win, and just like anything else in life random things happen and you have to deal with them. 

I'm a bit concerned about the unit not being able to rent for the  same amount as before, did something happen in the market to cause this? One thing to also consider is that you're not necessarily eating $300/month in cashflow. The tenant is still paying for a big chunk of your mortgage, while building equity in the home, and the property appreciating - there's more than one way to look at the scenario. 

In terms of selling and getting into another 30-year... what's the gameplan here? Why not just refinance into a 30yr on the same property - unless you absolutely hate it and want to get something bigger. 

My $0.02 there's more than one way to peel this onion, don't narrow yourself into just an option of selling and buying another house that you'll be in the same position with (numbers wise) in a short while.