Refi my first rental or wait a few years?

Question

Greetings. I see this question a lot and reading the discussions I am still unclear on what the best decision should be investment wise.

Here is the breakdown of the rental

• Purchased 3 years ago FHA for 164K
• Interest rate 4.25
• Mortgage 1137
• Amount left 153k
• Current Value 180k (judging based on a comparable that just sold in our neighborhood)

I also have a first time home buyer tax credit which is 35% of my interest per year that maxes out at 2k.

Rental specs

• 1350
• cash flow 213

Future cap ex

• new roof in 5 -6 years

Currently the 1137 payment includes a 176 in PMI so should I wait and attempt to refi to a 30 year conventional with the LTV at 80 percent? Or refinance to a streamline fha now to increase my cashflow by x? I guess another factor is how much would the out of pocket cost to do the origination.

I guess I should not be concerned about increasing my term being that the interest is being paid by the tenant anyway and leveraging that property to buy another that cash flows properly could compound paying it off faster then just purely trying to pay it off without the leveraged property. Is my logic sound?

Thanks for your help in advanced!

Justin Fox · Answer

@Antone King

Yep, I'll PM you in a bit.

Thomas S. · Answer

IN the real world a long term hold could never produce positive cash flow with your numbers.

You have not accounted for all normal expenses which on a SFH, which I assume this to be, would be in the 40%-50% of income range. Your expenses yesterday and today are irrelevant. What is important to understand is that the expenses are based on the life of the property.

Income $1350

Expenses (40%)  $540

Debt repayment  $1137

Cash flow    -$327/month.

Even if you eliminate the PMI you will be negative if you hold the property long term and if your expenses climb to the average of 50% ....more losses.

Today, tomorrow even next year you may be positive but over all you will be negative. This is very common with mom and pop investors as over the long hall they never really track the numbers or place any value on their time. They also never value the equity in their property. Some actually believe a paid off property increases cash flow (it actually has the opposite effect). One bad tenant, one eviction, one case of thousands in tenant damage/non payment and you will be glad to sell.

I would sell. What you will put into this property and management of tenants will not pay off.

Michael Herr · Answer

To answer the question you didn't ask:

I would doublecheck your numbers and think about selling and buying something different.

After paying for maintenance, cap-x, property management, etc, this likely is cashflow negative.

Are taxes/insurance escrowed?

Back to the question you did ask:

Refinance as soon as you can to get rid of PMI through either principal paydown or bringing money to the closing table.

Chris T. · Answer

@Antone King

Personally, I would refinance it and get rid of the PMI. And use that money to pay down the loan. Your logic is sound.

In my opinion, PMI does nothing for you. It's insurance for the lenders.

But you will need to bring more $ to put down. As long as you have enough reserves, it makes sense.

Some people would prefer to put down as little money as possible and leverage. There is no right or wrong way.

Will Pritchett · Answer

leave equity alone would be my take on this one or your payment will require pmi again and cash flow will decrease again. I would try to maximize CF on this one and save for the next one. Just what I would do.

JD Martin · Answer

Not necessarily. It depends on where you are investing and what you are spending. Greg's point was to the specific example you are showing in this post. You don't have $200 in cash flow because you have no funding for vacancies, maintenance or capital expenditures, even leaving out the costs of managing because you are self-managing. One major expense is going to wipe you out on this property. Let's just look at your need for a new roof in 5 years. Say the roof costs $10k. Your "cash flow" right now = $213*60 months (5 years) = $12,780. So in 5 years, if you didn't have to spend a single dime on anything else, and leaving out side item stuff like taxes, you've made $2k. Your risk to benefit ratio is off the charts here. What happens if the AC compressor goes out and costs you $3k?

I do very well with SFHs but they make sense where I am. In some other places they are rental losers. You have to construct your strategy based on your particulars. SFH's may be great where you are, just maybe not this particular one.

Michael Herr · Answer

I agree.

My post said "think about selling" and you should run the numbers and think about it: will likely decide to hold.

Especially after PMI is gone you can get this cashflow positive.

Don't give up. Many people loose money in thier first deal or two, this seems better than that.

Just make the next one a bit better, just hard to scale without that improvement.

Will Pritchett · Answer

@Antone King I would disagree with some who say to sell.  I respectfully disagree with the numbers of the guy who lumped you in with "mom and pops".  Some of the expenses he was accounting for outside of your mortgage payments are included in your Mortgage payments (taxes and insurance).  He may be a rockstar investor but his profile is hidden so no way of telling.  I'll agree this isn't a homerun property but the transactional expenses of selling and repurchasing another property aren't worth it.  You will also have tax advantages, debt paydown, and potential appreciation that isn't computed as an advantage here.  I'd read up on the 1 percent rule, the 2 percent rule, and the 50 percent rue here on BP.

I agree that you may not be able to refi out of the PMI yet but when you do it'll improve your numbers.  Also, check out the BP rental property calculator.  Run your current property and future properties.  You get a few free uses and then can upgrade your membership for unlimited.  Don't give up and make each deal better than the last one if possible.  Good luck!

Antone King · Answer

Can you provide me with the formula you just used so I can have this for the future?

Tone

Refi my first rental or wait a few years?

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