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

[Ryan Kelly]

@Cody Thayer #1) get a new lender, #2) refinance to a 30-year fixed rate mortgage, #3) find out why it isn’t renting and focus on getting a new tenant.

Don’t focus on the market of the minute. If you feel you made one mistake buying too HIGH, don’t make a second mistake and sell too LOW. The entire point of rental real estate is you don’t have to worry about up and down swings in the market with a cash flowing rental. Work the numbers and solve the cash flow problem. Keep it simple!

[Phommala Songkhors]

Cody, lets chat, if you can DM me, i would love to potentially purchase your property. 

[Vicky L.]

@Cody Thayer maybe if you rent it by the room to college students you'll make more money. Furnished or partially furnished, utilities included. I recently started renting to traveling nurses on Furnished Finder, so that's another route if you are near hospitals and the neighborhood is quiet enough.

[Allan C.]

@Cody Thayer I agree with the folks who advise not to sell. The error is already made with the purchase and selling only compounds the issue by adding transaction costs.

I may have missed it, but I don’t see where 1031 buys you much if you decide to sell. Seems like your cap gains is small, if any, and you don’t have much depreciation to recapture. 1031 is a constraining process and likely not worth it at your price point.

I would focus on what you can do to improve the situation (add value, reduce costs, etc).

[Cody Thayer]

Quote from @Craig Janet:

I post all of my rentals on Zillow. If you pay the extra $29 for the premium listing it gives you some great data to analyze your property. For example it gives you a total amount of rentals in your market over the past 14 days. In my market the supply of rentals is increasing. This tells me that demand is low. I know this for a fact because I'm having trouble renting out my homes even after numerous price drops (I never had any problems before). 

It also gives you a chart of the average rental price over the past year. In my market the average rental prices has decreased all most 20% from last year. So you can look at this data and see if it matches what your PM is telling you.

This is helpful info, I’m going to get that option because yes you are correct- I want to make sure my PM is giving me accurate information!!

[Cody Thayer]

Quote from @Carlos Ptriawan:

Quote from @Dan H.:

Quote from @Cody Thayer:

Quote from @Bill B.:

@Cody Thayer

Check your amortization table. Even if you kick in the $350/mo you’re probably paying off more than that on your loan, so you are not “losing money” (once it’s rented.)

I had a property with a negative cashflow of almost $800/mo because I wanted a 15 year mortgage on an expensive (to me) property. It lowered th internet rate more than 1/2% and saved me more than $500/mo in interest. I was also paying off $2,600/mo in principle. So I was kicking in $800/mo and the tenant was kicking in $1,800/mo. With a 30 year mortgage it probably would have basically broke even on cashflow but I’d still have 20 years of payments left. Now that it’s paid off with rent increases it brings in $3,000/mo cashflow by itself. If you have a decent job cashflow of plus or minus $300/mo isn’t life changing. Getting enough paid off properties to stop working is. You haven’t made any bad choices yet. 

People have no problem dropping $1,000/mo in to their retirement accounts with no cashflow, this is your retirement account. 

 That is a really good point Bill! I will say this, and it’s going to sound very ignorant of me. There are a lot of tools out there that I think I’m missing, such as an amortization table. I don’t have any guidance from friends/family, which is fine, but I’m learning everything from asking questions like this. Do you have a good resource(s) for me to research and pull these tools/tables from? It would help me with the math and margins where I struggle with naturally lol 

 >Do you have a good resource(s) for me to research and pull these tools/tables from

Virtually every mortgage calculator will give access to the loan payment/amortization table. On my phone I have ZillowMortgage app that I can quickly run loan scenarios and see the associated amortization table.  

Using a mortgage calculator, you can easily compare your current mortgage to a 30 year mortgage at the current rates to have an estimate prior to getting the info from your mortgage broker.  

THe amortization table should be the first chapter one in any biggerpocket book.

This may not be relevant to the original question but worth explaining.

 what you need to do with amortization table is this, for example, I have the excel spreadsheet. This sheet can display the equity portion of the chart and also the remaining mortgage chart; if the excel sheet is good, you could also add another layer of chart if you add additional payment.
From there, you check at what month the cross between the equity and mortgage, in a typical 30YFRM, it would be at the 18th year usually (I may not be accurate on this), but if you add $200 a month, the cross could be on the 15th year (for example).

Now if you good enough with excel, you can add the 4th element of the chart, which is the appreciation forecast, I did it a lot. In here I forecast the appreciation (any guy that says appreciation can't be forecasted is simply don't understand anything about how an investment works). Overthere you add the appreciation into equity building. So you have home value-mortgage remaining+appreciation value. This chart will show you a new cross to the mortgage level. Usually at year 11-12.

This is where when leverage is utilized property, in a low-interest rate environment, I can pay off one 30YRFRM loan in less than 10 years without doing anything because I have one primary and one rental that appreciates at the same rate. So when you build equity in the other house, it literally pay off the other house's mortgage as well, while the mortgage in that home is paid by the renter.

That’s a very cool way of looking at this! I plan to start a table this weekend, so I’ll dive deeper into this message for that! Thank you!

[Scott Esmail]

I have done many 1031's Selling cost money you also may encoure a fee for paying off mortgage so soon. Its a very hard time of year to rent. Look at comps see if what the house should be listed for and then slightly rent for less. Also maybe the property manager is the issue ? If you 1031 into a new property there are fees again, mortgage cost rehab closing etc so sometimes your not much head. I would only sell if the actual property was a issue like the area was bad or the property had too many work order issues. Losing $300 per month is a lot but if you can get it rented and possibly rent go up a bit then if might be okay. Your also paying down the mortgage each month so some of this $300 if not all is going to the loan. If it was me and its was just a rent issue I would save all the extra work by selling and finding something new and just hold. Over time you hopefully should get the extra $300 and maybe even more down the road to even out the losses. In regards to sell now the prices are going down next year, people said that at the beginning of covid and  they did not. Its too hard to time the market so do use that as a factor. Even if prices dropped in lets say 3 year and you decide to sell then your 1031 so the new property would have dropped too. The only time a price drop matters is on the cash out i guess. Good luck maybe trying to do a light reno to the property will attract more renters and maybe get a few bucks more per month

[Steve Vaughan]

Quote from @Luka Milicevic:

There's nothing wrong with the advice your lender gave you. I would have given you the exact same advice. 

70% of my properties are on 15 year notes. 

Completely agree and have had a lot of 15 yr mortgages.  The rate can be 20-30% less than a 30.

15s are a long-term view. One saved me $180,240 in interest vs a 30.  

Guess what my payment is on those now?  Zero. A 30 still as a 70% balance when a 15 is DONE.

3 months of vacancy and a 30% decrease in rent rate is the problem, not the 15yr mortgage. 

[Carlos Ptriawan]

Quote from @Steve Vaughan:

Quote from @Luka Milicevic:

There's nothing wrong with the advice your lender gave you. I would have given you the exact same advice. 

70% of my properties are on 15 year notes. 

Completely agree and have had a lot of 15 yr mortgages.  The rate can be 20-30% less than a 30.

15s are a long-term view. One saved me $180,240 in interest vs a 30.  

Guess what my payment is on those now?  Zero. A 30 still as a 70% balance when a 15 is DONE.

3 months of vacancy and a 30% decrease in rent rate is the problem, not the 15yr mortgage. 

 15 years amortization table is awesome if one understands to read the price chart ...
but what folks doesn't realize, you could do the same to 30y frm by adding more principal.
remember how FRM amortization table is calculated, there's time component on top of those,
so paid more principal early equal to more equity at the end

this is the easiest way to make money in long term without buying any guru class lol

[Steve Vaughan]

Quote from @Carlos Ptriawan:

Quote from @Steve Vaughan:

Quote from @Luka Milicevic:

There's nothing wrong with the advice your lender gave you. I would have given you the exact same advice. 

70% of my properties are on 15 year notes. 

Completely agree and have had a lot of 15 yr mortgages.  The rate can be 20-30% less than a 30.

15s are a long-term view.

3 months of vacancy and a 30% decrease in rent rate is the problem, not the 15yr mortgage. 

 15 years amortization table is awesome if one understands to read the price chart ...
but what folks doesn't realize, you could do the same to 30y frm by adding more principal.
remember how FRM amortization table is calculated, there's time component on top of those,
so paid more principal early equal to more equity at the end

this is the easiest way to make money in long term without buying any guru class lol

 I hear you, Carlos.  A nice gift from parents for newly weds with a new house is an extra house pmt principal only.   I think that alone shortens the payoff by 9 months. 

I like 15s only if the rate is approaching .75% less than a 30.  Otherwise the flexibility of the 30 is worth it.  

[Carlos Ptriawan]

Quote from @Steve Vaughan:

Quote from @Carlos Ptriawan:

Quote from @Steve Vaughan:

Quote from @Luka Milicevic:

There's nothing wrong with the advice your lender gave you. I would have given you the exact same advice. 

70% of my properties are on 15 year notes. 

Completely agree and have had a lot of 15 yr mortgages.  The rate can be 20-30% less than a 30.

15s are a long-term view.

3 months of vacancy and a 30% decrease in rent rate is the problem, not the 15yr mortgage. 

 15 years amortization table is awesome if one understands to read the price chart ...
but what folks doesn't realize, you could do the same to 30y frm by adding more principal.
remember how FRM amortization table is calculated, there's time component on top of those,
so paid more principal early equal to more equity at the end

this is the easiest way to make money in long term without buying any guru class lol

 I hear you, Carlos.  A nice gift from parents for newly weds with a new house is an extra house pmt principal only.   I think that alone shortens the payoff by 9 months. 

I like 15s only if the rate is approaching .75% less than a 30.  Otherwise the flexibility of the 30 is worth it.  

 right I answer this for Cody actually, I know you know this stuffs Steven :)

Just telling any newbie investor, it's possible for 7% interest-rate mortgage to perform on the same level to 2% mortgage rate performance if one plans accordingly.

What do we need to do ? by buying time component of mortgage early.

[Kevin S Inguito]

Hey, Cody:

I own two SFRs in Memphis, TN, both turnkeys managed by CB Properties. One property is in 38116 rents for $1245 (4bed / 2 bath). The other is a 3 bed / 1 bath) rents for $960. I'm happy with CB Properties and their services. I've also heard good things about Mid South Home Buyers and their management. Unfortunately, there are a lot of bad PMs out there. Keep reaching out until you get someone who can get solid renters in there, assuming you choose to hold. I just had a call today with Rachel at 901 Real Estate Services in Memphis. They also manage properties. Might be worth a call to them as well. 

Good luck. Sorry for the headaches, but the learning over time is worth it. 

[Dan Garrigus]

Quote from @Cody Thayer:

Quote from @Dan Garrigus:

Hi @Cody Thayer I can definitely understand why you are thinking the way you are but you definitely DID NOT mess up. If you can still financially afford the monthly payment this is should not be the time to decide whether or not to 1031 this property. 

The question should be, How is this property being marketed? What can be done to the property to create a desire to be rented? How can I add value to the next tenant? Etc. The problem seems to be a marketing issue behalf of the Property Management Companies that you have used, granted this time of the year can be more difficult find a tenant with all the holidays.

If the situation is more financially dire, I would consider refinancing. Yes, you will end up with a higher interest rate but you will also have an additional 17+ years to pay off the principal. When rates come back down and they will come back down you can always refinance it again to increase your cash flow. If you were to sell and 1031 you will most likely incur a higher rate than you currently have so selling to 1031 doesnt help the situation.

If I were you, I would refinance it to a 30 year and find ways to add value to the property to draw tenant interest your way. Never discount your monthly rate either, give a first month at a heavy discount or maybe even free to help your situation.

Hope this helps!

 I love these ideas! I love the first month free/discounted. Going to send this to my PM now. Because a) if it rented for full asking last year, then it should rent for full asking this year. And b) if I can afford the mortgage the last 3 months, then I can afford it one more month to get a tenant in!

I will be looking into this, thank you!!

 Hey Cody! I just noticed you had responded. Did you have any luck or potential interest in your unit that you're looking to rent out?