refinance potential rental to 15 or 30 year mortgage?

Question

I will most likely move in with my fiance in a year or so & rent my condo out. With mortgage rates very low, I'm thinking of refinancing my condo in anticipation of this move.
Currently my mortgage principal & interest, condo fee, and property taxes are $2,100/month. My current mortgage has 94 months remaining and is 3.25% fixed.
The condo would rent for $1,500/month. So I'd need to contribute $600/month on top of the rent, leaving no cash flow for repairs or whatever.

I could refinance to a low/no cost 3.25% 15 year fixed mortgage & the monthly principal & interest, condo fee, & property taxes would be $1,433/month, leaving $57/month in cash flow.

Or I could refinance to a low/no cost 3.875% 30 year fixed mortgage & the monthly principal & interest, condo fee, & property taxes would be $1,150/month, leaving $350/month in cash flow.

I have no intention of selling the condo, so am leaning towards the 30 year mortgage for the extra income. But I have no experience with this type of decision. Do you have any recommendations or tips?

Jerry W. · Answer

@David Cole, no offense, but as a rental your condo stinks.  You only have 8 years left on it and you refinance out to 30 years you will still lose money.  Unless that thing is going up in value like mad just sell it and buy a place that cash flows.  You will not cash flow under any of the options you mentioned.  You have not factored in the cost of repairs, insurance, vacancy rates, etc.  I understand you have no cap ex if the condo pays for roof and siding etc.  Still you will need to paint it once in awhile, put in new carpet, fix dents in the wall, etc.  Most folks figure 50% of the rent goes to upkeep and other expenses.  Even if you only figure 25% you will lose money.  Would you rather lose money for 8 years, for 15 years, or 30 years?  If you must keep it they pay the extra and pay it off without refinance or go the shortest you can.  Look up the 50% rule there are hundreds of threads about it.

Steve Vaughan · Answer

At least condo renters can't kill the yard.  The screens, appliances, doors etc are about all.  As long as they don't smoke inside, the wreckage will be more minimal.  Remember - renters have a different mindset and sometimes don't pay or worse.  Your ROE is negative, cashflow is negative, etc.  Keep it if you must, but I would just buck up and pay it off.  Live a little (94 months) like no one will, the rest of your life like no one can.  Cheers!

David Cole · Answer

Thank you for the feedback.  I just started a refinance to a _30_ year fixed mortgage, so after paying principal & interest, taxes, & the condo fee, $350/month will be left over.

I have approx. $100k in equity.  If I sold the condo now, I would almost certainly lose at least $20k because the value has decreased since I bought it.

David Roberts · Answer

The math says sell it.  Dont ever argue with math.

You said early on in the thread you will have 57/month after taxes insurance and mortgage.  Did you figure the taxes to change to non homestead once you no longer live there?  They will go up substantially and again make you negative before anything at all goes wrong.

But even if you did figure for non homestead taxes, you are going to lose money over time with the cap ex and vacancy.

Taxes will probably go up by more than 57 bucks just from the taxable value adjustment next year,  turning you cash flow negative before you have to fix anything.  Nothing worse than having to pay out of pocket for a house you dont live in.  It gets old really fast.

If you are in a fast appreciating area, I could see the strategy for waiting a year or two to get more out of it, but then you have to exit. Otherwise you are just losing money,  and whats rule number 1 in investing? Dont lose money!

Dont waste your time.   That's the one thing you cannot recover.

I might have missed it but how much equity to you have in it now?

If you have quite a bit, itll be tax free if you sell it before you change your primary address as well.

Thomas S. · Answer

That is a really expensive safety net you are thinking of keeping.

If I were your fiancé I would give back the ring until you are ready to make a real commitment.

Fred Heller · Answer

I understand the concern for cash flow, or lack of it. But I would rather chew off my arm than ever refinance again. Every time you refinance you're adding thousands of dollars to your principal.

I bought my house in 2003 and have refinanced twice. Yeah, every time I got a more favorable rate and lower payment, but I ended up owing $135,000 on a house I bought for $118,000 just a few years earlier. Thirteen years after buying the house I still owe $3000 more than I originally paid for the house.

I'll never do that again.

Missy H. · Answer

Hi @David Cole

I would refinance to a 30 year to eliminate the $600 per month that you are paying.  You indicate that you would have a $350 cash flow.  However, I do not see where you would have accounted for repairs, property management or capital expenditures/special assessments.  You should probably count in 10% for each of these.

I recently refinance my property that had 20 more years left on it.  I refinance to a 30 year to lower the monthly mortgage that would equal the rent.  I rest easier at night knowing that I don't have to come out of pocket on this.

Good luck.

Account Closed · Answer

I agree with @Fred Heller.  There is something dissatisfying when refinancing and adding thousands to your principal.  Sure, you can pay closing costs in cash, but with only 8 years left on this loan, wouldn't it be better to just use that cash to accelerate your payments and end up with a paid off property sooner?

JD Martin · Answer

Towards your original question: go the 30 year route. The extra cost of interest is the cost of doing business for flexibility. You can always pay more if you want to get it done faster, but you are not obligated to pay more. In either case you are looking at historically low interest rates; get in a bind down the road and you will have a much more difficult time getting the lender to agree to take a lower payment, and it is not likely you would find cheaper rates later wherein you could refinance to lower your payment further.

I agree with Jerry, however; the property sounds like a loser as a rental. Why not refinance and have the fiance move in with you instead? Is your plan to buy something that will be cheaper than what you are paying on the condo, or something fancier? If the latter, you're only digging a deeper hole.

Igor Messano · Answer

Yea that is definitely a hard situation to get out of and I hope you can work it out. Let us know how everything turns out with the financing and leasing.

Best of luck, Igor

refinance potential rental to 15 or 30 year mortgage?

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