Low interest vs. high cash flow potential?

Question

Currently renting a single family home purchased with a 15yr 2.25% loan. Have about 100k equity. Current income has me breaking even.

I'm considering selling to purchase a STR or other property that has higher cash flows but obviously wouldn't have the low interest rate.

Please share your advice and things to consider when analyzing my options!

Theresa Harris · Answer

Think long term.  How long are you going to keep the place and how quickly are rents going up in your area?  15 years may seem like a long time, but it goes by quickly and because you took a shorter term for the mortgage, the tenants are paying it down faster for you.  Yes a longer term mortgage would have lowered your payments (and increased the amount of interest you paid), but live and learn.

Honestly, I'd probably keep it.  You raise the rent a bit each year and that is your cash flow.  I'm not sure you'd get a better return on a new rental with today's rates and house prices, plus adding in closing costs, etc...

Rick Pozos · Answer

Think of the house as a retirement fund. You are putting a little money into it every year. In 12 more years it will be paid off with only minimal input from you. You will have some great cash flow after the mortgage is paid off. OR think what kind of equity you will have. A paid off house that is worth $XXX. That will be some big number.

Jaron Walling · Answer

Did purchase or refinanced this property during the ultra low interest climate a few years ago? What are the numbers and why does it not cash-flow more? Are you at market rate rents?

The interest rate on a loan is one factor (of many) you need to consider when building a rental portfolio. The condition, age, and future capex issues are more important in my opinion. If the property is bleeding money every year from repairs, maintenance, or turn over you'll never get ahead.

You can tap equity with a HELOC (challenging right now), cash-out refinance into a new loan (much higher rates), 1031 exchange, or sell (tax hit) but the numbers and property condition need to guide this decision.

Dave Foster · Answer

@Ian Jeppsen Did you happen to have lived in the property for two of those years? If so you could qualify for the 121 exclusion and take the first $250k of the gain tax free.

You could also do a 1031 exchange and indefinitely defer all the capital gains tax. This would let you use the tax to your advantage to purchase a larger nicer property in an area the provides higher cash flow potential. So if you sell your property you could get a duplex or multi-family somewhere with a more attractive market. Then after your exchange you could do a cash out refi or a lower rate as well as access some cash for a rainy day.

I would calculate and compare the numbers of, first what the property might cost you to hold onto it versus selling and repurchase at a higher interest rate without a 1031 exchange. And lastly if you sold and did a 1031 Exchange deferring the tax.

Jaron Walling · Answer

@Ian Jeppsen This is a bread and butter rental. The tenants are paying down the loan, not you. The growth on equity is outpacing any cash-flow. If they pay on time, you don't have much turnover, and you don't see big capex expenses on the horizon I'd continue to hold. It's a win-win. Hopefully you have reserves for a rainy day. You could tap equity to pay for it worse case. This property gives you options. Pulling this off on a 15 yr note is crazy now days.

Alan Asriants · Answer

Wow 2.25% for 15 years.

Can't believe this was even offered in the first place.

Actually free money...

If you're breaking even, I likely would just keep holding it. You're paying down debt fast and your not accuring much interest at all. You'll thank yourself in 12 years.

Also this is probably a great tax shelter

Ian Jeppsen · Answer

Yup purchased the property 3 years ago. 15 year loan gave me the ultra low rate. In retrospect I could have done a 30yr loan and cash flowed about $800/month. I’m renting the property for fair market value.

Even though I’m essentially paying for repairs out of pocket the equity gain may outweigh the cash flow alternative.

Low interest vs. high cash flow potential?

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