Breaking even & don't want to sell; options to improve cash flow?

Question

I currently have a rental property that is, on average, giving me zero cash flow (up until my recent rent increase, I was paying about $100-200 out of pocket per month).

Before I get beat up on that... I got divorced 4 years ago, decided to keep the house (because it was under water), and decided to rent it out because 1. it was too big for me, 2. it was too far from work, and 3. it was emotionally difficult for me to live there. I figured I could wait it out until the market improved (and it has!).

My tenant in it since 4 years ago has never had a late payment. She's a single mother with 5 kids, trying to make it on her own. Ideally, I'd love to sell it to her (and save the real estate commissions for agents), but she is still trying to fix her credit (from her bankruptcy in her previous marriage and existing student loans) to be able to get a mortgage. I can't get myself to kick her out and sell the house under her - but I also am really wanting to get some positive cash flow out of it.

Numbers: House is currently worth about $280k with $135k left in principal. I had refinanced it to 20 years at 2.67% just 4.5 years ago - so the 20-year refinance is obviously cutting into my cash flow.

I currently have my primary residence in a townhouse I bought 4 years ago - worth about $180k with $110k left in principal on a 30 year mortgage at 3.75%.

What are my (smart) options to still keep the house, and create positive cash flow? Refinance?  Tap into the equity I have in my townhouse (equity loan)?  Or - assuming I can't get myself to kick out a single mother of 5 who pays every month - is my best option keeping it until she's ready to buy and just make sure I am at least breaking even?

On a not-exactly-related note, what are the pros/cons of using equity in my townhouse as a down payment to purchase another home (rental or primary residence), versus saving up for the cash? Hopefully in a year, I'm hoping to rent my townhome (I can definitely get positive cash flow) and buy a primary residence.

Thoughts, opinions, and suggestions are welcome - thank you!

Steve Vaughan · Answer

You have seen some amazing appreciation and principal buy-down on this property if it was underwater 4 years ago @Takahito Torimoto.

I like that your 'til death, I mean mortgage, only has about 15yrs left at under 3%. I wouldn't touch that.  Not for a lousy couple hundred a month.  The closing costs will be around $4k.

I have one just like this.  A flip from '07 that turned into an accidental rental.  'Breaks even', but is a good appreciation asset, pays down every month and has tax benefits.  For me, it is barely 3% of my portfolio door-wise though.

I would keep it if I had a good w-2 job or income.

If this is eating you up as a huge % of your world, you may want to sell.  Most primary homes are not good cash-flowing rentals. Too nice.  I'd never buy my example as a straight rental, but when the dust settles when I sell in a year or 2, I think I'll find my IRR to be outstanding. You will probably experience the same.  Good luck!

Thomas S. · Answer

You rational is causing you to make poor decisions, unless you are managing a social assistance program of some sort you are not rational in you desire to financially support a family that is not your own. I would expect you have better things to do with your money that support a tenant.

The reality is that you are at minimum still $560/month negative cash flow and since you have not stated what she is paying in rent I would guess much worse off than you think.

The negative cash flow is from the equity you have in the property, $135000 at 5% return is $562.50 per month. That is lost income therefor negative cash flow from the property. Even at a  return of 2.67% (your mortgage rate)  you are losing $298/month.

You need to sell and have your tenant move in with you if you want to continue to support them financially.

Takahito Torimoto · Answer

Was looking at just cashflow.  Largely because I feel like that's where the primary value is in investing vs seeing the benefits at sale only.

So a follow-up question:

Maybe a better option would be to look into doing a Land Contract or Lease Option (Rent to Own).

Trying to understand, from my perspective, which makes more sense?  Pros/Cons of each?

I assume for a Lease Option, it'd typically be converted to (monthly rent + $ towards down payment) for the tenant vs (~10% cash down payment + mortgage with 3-5 year balloon) for a Land Contract - but trying to understand the pros/cons of each to make a decision between the two (besides the upfront down payment on a Land Contract vs monthly payment towards down payment on a Lease Option)?

Jeff Gates · Answer

Have you thought about the rent-to-own contract? I don't want to talk details here but a friend of mine did these for while. They improve cash flow. You would need to change the tenant.

Mark Holencik · Answer

You are putting $425 a month into a savings account which is called equity. This increases every month, Feb. 2018 this will be over $450 a month. Plus all the tax advantages.

Helping a single mother with 5 children has more benefits both financial and spiritual,  then any other property you own.  It is a good thing that will carry you far in this life.

Thomas S. · Answer

With your tenants personal situation you have next to no chance of selling her the place with any option. She will never qualify.

Ryan E. · Answer

You could maybe look into doing a lease option if you want to sell it to your current tenant...maybe pass along the maintenance and repairs to the tenant thus improving your cashflow. I just read the no and low money book and a lease option was the first thing that popped into my head while reading your situation.

When you say you are breaking even are you just looking at the cash flow or are you factoring in debt pay-down, appreciation, and tax benefits too?

Takahito Torimoto · Answer

I did look into refinancing the house into a 30-year, but the rates are all higher, and I couldn't find any benefit.

I realized "underwater" was not the right word, actually - it was bought in 2003 for $215k, and 4 years ago it was around $260 - but it would have required a LOT of work (fixes) to be sellable at that price.  Before 2008 it went up to around $300k.

And yes, I have a good W-2 - it's not that I need more cash flow, but it'd just make me more comfortable and happy :-)

Thanks for all your suggestions - looks like I just need to keep my current rental house "as-is" (at least keep it break-even) and hopefully I can convert my current townhouse into a profitable rental (waiting to get off the HOA "rental request" waiting list).

Chris Carollo · Answer

I wouldn't personally throw any more money at the property, especially from your own townhouse to make it cash flow. Are you also looking at the Mortgage Paydown and Tax benefits when you run your investment analysis?

If you refinanced to a 30 year now(ideally at a better rate than your 20 year based on current rates) would you be cashflow positive? What if you refinanced your current balance into a new 20 year at today's rates?

Breaking even & don't want to sell; options to improve cash flow?

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