What to do with a (underwater) $1.45M property with a 2.78% mortgage...?

Question

2.5 years ago, we sold a house we'd owned for two years for $900K (paid $480K) and we used the proceeds to buy our current house in the very best neighborhood in Boise for $1.45M and then we spent another $150K (in cash) on improvements.

Our mortgage is at 2.78% for 30 years and our mortgage payment (inc taxes and insurance) is $6K/mo. Our monthly income is just over $20K/mo before taxes.

Last summer, we were away for a few months and we made $25K from AirBnB on this house. This year, we won't be away for the entire summer, so I estimate we'll earn about $12-14K from AirBnB (house rents for about $400/night).

In hindsight, we bought too expensive of a home, and the problem I'm trying to solve is that I HATE having a $6K mortgage payment....but we LOVE the house and the neighborhood.

Options I see:

1. We could sell the house..but it is not worth what we paid, so we'd take a significant loss, plus we'd be walking away from a 2.78% mortgage
2. We could AirBnB it more....but then we have to incur the cost/inconvenience of being out of the house more often
3. We could build an ADU over the detached garage..but we'd have to refi the mortgage and we'd lose the 2.78% rate

When it comes to lowering our house-related expenses, what am I not seeing? I would love to hear your suggestions.

Thank you!

Molly Arnott · Answer

Hey Trent,

Couple things come to mind for me reading about your situation. Making $25k over summer concerns me based on the estimated value of your home. My $500k meridian homes make $25k over the summer each year, summer is our high season so the rest of the months don't compare. If you short term rented the home year round, I'd be trying to figure out if it's even profitable? By my estimates I'm nervous it wouldn't be. And you have significant capital locked up in that home. So that leads me to the question, what are your goals? I like living in nice houses, don't get me wrong. But we down sized when we got serious about our investing journey. Is your goal long term appreciation? Or cash flow? Drilling down your specific goals will help guide you in making your next moves. I'm a goal setting junkie so reach out if you guys want to grab coffee and talk shop :)

Trent Dyrsmid · Answer

Thank you all for your input. My wife and I just did a spreadsheet on the expenses and thanks to the low interest rate, the tax deduction we get on the interest, the loan principle pay down (due to the low 2.78% mortgage) and the AirBnB income....it is actually more economical to say put than to sell, take a huge loss, and then buy a house worth say $700K at current rates. So, we plan to stay put and enjoy the house...and rent it out only when we go camping...which we do 10-12 weekends a year.

Dan H. · Answer

Selling and losing $500k.  No

Airbnb rents seem marginal at best on this property for its value and you would have your housing expenses.  $25k STR rent minus $18k PITI.  When you add other expense such as maintenance and cap ex, it has small cash flow in the high season.  It does not seem like a great option unless you want to go other places for much of the year and use your current home as just a base.  Realize this would not produce much cash flow.

Add the ADU likely would cost more than the value it would add and you would lose your great loan.  No

Stay in the home that you love and pay for the nice home and neighborhood seems like best option and it really is not a terrible option (it would be terrible if you did not like the home or neighborhood).  I suggest you concentrate on the positives.  When the market comes back, you can reevaluate selling.

Good luck

Matthew Masoud · Answer

Yeah I would not give up that rate in a market like that.

You may want to consider moving to a smaller home and Airbnb this home full time.

When it's not booked you can still enjoy it.

Not ideal but financially responsible.

Sounds like a beautiful home.

Chris Seveney · Answer

@Trent Dyrsmid

How much is it worth? How much of a loss would you take? Can you afford to take the loss?

Building an ADU is an awful idea as you probably will not get that $ back and build yourself in a deeper equity hole

Comes down to either sell it or keep it, and really it’s a personal choice as you either lose a lot of $ now or lose it over time and hope it appreciates some day in the future

Chris Seveney · Answer

@Trent Dyrsmid

Is it the mortgage on it is upside down or you just do not want to lose $500k.

If the equity is there then it’s either death by 1,000 cuts and keep it or just rip ofd the band aid all at once.

If the latter I always caution people to throw more money at a losing asset unless you plan to keep it for next ten years and pay for it next ten years and eventually it will catch back up, but unfortunately not anytime soon.

Theresa Harris · Answer

With an income of $20K/month, why not save and build an ADU that you can live in while AirBNBing the main home?  Even if you moved to a less expensive home in the same areas, with the current interest rates, you are unlikely to decrease your mortgage payments.

Trent Dyrsmid · Answer

We'd lose $500K...so that is not an option.

Ell Jay Lindsey · Answer

Why not seller finance it?

What to do with a (underwater) $1.45M property with a 2.78% mortgage...?

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