Should I refinance or let it ride?

Question

Hello everyone. This is my first Official post. I will try to be as descriptive as possible.

I own a SFH in Virginia Beach that I purchased 7 years ago with an ARM. I'm currently paying 2.375% interest and it's set to change Nov 1st. I bought for $200k and currently owe about $180k. I'm receiving $1125/mo and expenses are $1035.

So with this in mind, I have been debating on either sitting on this since my interest rate is so low or refinancing and taking advantage of some more cash flow. I originally figured I would wait to refi when the ARM adjusted to a higher %.

I'm a little stuck here.

Devan Mcclish · Answer

You can't refinance and pull money out. You're already leveraged on the property up to 80%. No bank will let you exceed that. You can't refinance lower without bringing money to the table. They are not going to let you refinance from 180k in debt to 150k in debt. They would be losing 30k on that. and you can't lower your mortgage by getting rid of the ARM. You have to bring money to the table to do that

You have three options here.

1. Keep renting it and keep breaking even at the current rate. When rates go up, you will start to lose money.

2. Sell it - which is what I would do because this isn't a very good cash flow deal anyway.

3. Refinance and lose money because the rate will go up.

David Soleymani · Answer

@Devan Mcclish

Thank you. I think it's clear what I need to do. I'd rather get rid of it and buy another property closer to home.

Joshua D. · Answer

@David Soleymani

If I was you I would think hard about selling the property and moving the equity to a better investment.  If you came away with 20k could you buy a property for 100k that rents for 750-800 a month?

Are you sure in the long run you are not losing money on you current investment. Do your expenses include things like vacancies, property management and cap-ex?

Did you live in this house before hand?  is their any kind of tax break you could get by selling?

Brent Coombs · Answer

@David Soleymani, usually, having a very low interest rate for your investment mostly helps if it then allows your cash flow to be healthy. Doesn't look healthy to me. What's the current value of the property? If your Lender will let you keep the interest rate it's due to change to, but for a different (swapped for better cash-flow) property, would that idea appeal? All the best...

David Soleymani · Answer

Joshua D. Unfortunately, I moved out of there in Jan 2011. I'll talk to my CPA about other options. I think everyone's in agreement that this property needs to go!

Thank you all for the support!

Ben L. · Answer

@David Soleymani I agree with the others. The cash flow is low, just get rid of it and invest into something better.

I used to live in San Marcos, I miss the west coast.

David Soleymani · Answer

@Brent Coombs@Luka Milicevic

When I purchased this house, years ago, I wasn't trying to make money off it. I wasn't planning on investing. Life happened and I moved away so I decided to rent it out. From what I've learned the last few weeks and especially in this post is that I've really just been lucky.

That being said, my next purchase will be with income in mind! And $90 is unattractive to me, as well!

Luka Milicevic · Answer

Interest rates can only go higher from here. I think the rent on this property is too low for the value, but then again, I don't know that market.

If you can't raise rents then I would most likely sell.

Alternatively, if you don't want to sell, refi to a fixed, but put some money down in order to lower your monthly payment.

If it was me and I wasn't able to raise rents to $1500 (At least) I would sell and move one.

$90 cash flow is not attractive to me.

Brent Coombs · Answer

@David Soleymani,  a CPA should be able to submit that even at full current market value, there is no capital gain anyway?

(But for future, you SHOULD aim for capital gains)! All the best...

Joshua D. · Answer

@David Soleymani

When did you move out of the home? There is a tax loophole for those who have lived in their home 2 of the last 5 years. You pay NO taxes on the gain...  If this applies to you then I would encourage you to sell while the profits are that good.

Just my thoughts. See a CPA for better info.

The purchase price of the next house is not as important. Getting a good return on your money is... Figure out what that is and make it happen.

Should I refinance or let it ride?

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