Refinance from negative cash flow to positive cash flow

[Daniel Kent]

Hello BP Community!

I have a rental property in Philadelphia which within the past year I just refinanced to reduce the term of  the loan from 25 years to 15 years.  This property was originally purchased as my primary residence and then became a Single Family Home rental.  In the recent months I have been looking to purchase my next single family home rental and have been analyzing other deals in the area.  In doing so, I decided to analyze my current property, which I have never done, being that it was originally purchased as my primary residence.  In doing so, I discovered that this property (with the refinance) now has a negative cash flow of about -$1,200/year.  I am debating what my next step should be.

1. Sell the property and purchase another Single Family Home rental with potential positive cash flow.

2. Refinance (although the last refinance happened about 1 year ago) to a longer term mortgage to bring it back to a positive cash flow property.

3. Nothing.....keep the shorter term mortgage and enjoy the positive cash flow once the mortgage is paid off.

Thanks in advance for everyones input/advice, and I would be happy to answer any questions that might help in this decision.

[Llewelyn A.]

@Daniel Kent

Here is an easy calculation for you.

Let's say your original mortgage was $100k.

Since you have it on a 15 year fixed rate mortgage, take the $100k and divide it by 15 years.

$100k / 15 years = $6,667 per year.

If you include the fact that your Mortgage goes away in 15 years, then you are effectively building up Equity on average by $6,667 per year.

If you add your negative cash flow to your positive equity growth via Mortgage Reduction, you get NEGATIVE $1,200 PLUS $6,667 = $5,467 POSITIVE Per year.

If your Property is in a solid area where the value of your property will continue to be at or above the current value by the 15th year, you are doing fine to me.

I've been investing for 20 years in Brooklyn, NY. I get plenty of other advantages other than cash flow.

You have several ways of making money in RE.

1) Cash Flow

2) Mortgage Balance Reduction

3) Appreciation and

4) Tax Deductions

5) Leverage your Equity

While you don't have 1) Cash Flow, the others will help out over time.

You WILL get 2) Mortgage Balance Reduction if you locked in a 15 year fixed rate mortgage

You MAY get 3) Appreciation, but that's not guaranteed, however, you don't need to depend on this since the Mortgage Balance Reduction could be significant.

You are PROBABLY going to get 4) Tax Deductions as you will wind up getting Depreciation added as it converts to a rental property. Check with an Accountant to make sure.

Also, in 15 years.... congrats.... you WILL get 1) Cash Flow as the Mortgage disappears.

Along the way, you can possibly 5) Leverage your Equity with a Loan. Then reinvest that equity into other rentals.

Another calculation which can be done is how the Cash Flow increases over the 15 years. For instance, do a 15 year projection of rents (say increasing 3% per year) and Expense Increases (say 5% per year) and you will also understand your Cash Flow Growth.

Let's say you are collecting $2k per month in Rent or $24,000 per year.

Let's say you are paying $500 per month in expenses or $6k per year.

Year 1)

New Rent = $24k x 1.03 = $24,720

New Expenses = $6k x 1.05 = $6,300

NET is an INCREASE in Cash Flow by $720 minus $300 = $420 per year.

Funny how if your expenses are increasing more than your rents you actually still increase your cash flow.

Simple calculations but it tells a lot.

There are more to RE than just Cash Flow......