Primary Residence into a Rental, but is on a 15 Year Mortgage

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Primary Residence into a Rental, but is on a 15 Year Mortgage

Nathan Wayne
Harvest, AL · Member since 2017 · 3 posts · 0 votes

Hi Everyone,

TL;DR: My rental is building equity, but not so much cashflowing. What should I do?

I'll get right to it, since there are numerous posts like mine.

I am currently renting my previous primary residence:

3bed, 2bath, 1600 sq. ft., 2 car garage, .33 acre lot, fenced, built in 2006 - shows well, and the market is pretty warm, thinking it's going to get hot due to economic development in the area. Toyota manufacturing plant within a 20 minute drive is being developed and should be operational in about 2-3 years, and will bring over 4000 direct jobs.

Home Value: ~$150,000

Mortgage: $1,004/mo. with a 2.875% interest rate on a 15 year mortgage, and includes the property tax escrow and the insurance.

Remaining Loan Balance: $88,000

Rental Income: $1,100/mo. Which is high for the area, but the home is worth it, and will probably remain at this or a higher rent for the foreseeable future.

I have a steady career, and if it were to go vacant for a month or 3, I would be able to carry the mortgage. I'm also in a position to cover any capital expenditures for the foreseeable future, which would most likely be the HVAC, since the roof is 6 years old.

I'm also carrying a mortgage on my current residence for $800/mo. if that would factor into anything.

I'm self managing the property, to get some experience and saving on PM fees. 

Should I explore other options with this property? Refinance the $88,000 balance and potentially cashflow $500/mo. free and clear? Should I sell the property and look for other options? Should I try and pay the mortgage off early, to get to cashflow, and build money for future real estate investments (I should be able to do this within ~3 years if I keep it rented)?

A few additional thoughts: If I decide to pay the property off, I'll most likely hand over the management to a dedicated property management firm in order for it to be a more passive income earner.

Thanks for any help,

Nathan

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  • Gordon French
    Pueblo, CO · Member since 2018 · 64 posts · 32 votes
    8y

    I like 15 yr notes. For me any 15 year not will be paid of when I am ready to retire. Why worry about the cash flow as long as it is cash flowing. Its build equity and you could use that equity to secure other properties. I have about 8 liens on my home. I often pay 10% cash down, and but a 10% commitment on my home. You could do the same. The rent should go up over time. If the house is in good shape and you don't expect any big issues I would leave it.  


    Can you reduce the cost of your insurance? I don't use full replacement cost. My houses are insured for cash value. If it burns down I will walk away with enough to go buy another and just walk away. The savings per month is worth the risk for me. Technically, I would lose nothing since I get back what I paid for the home. 

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  • Nathan Wayne
    OP
    Harvest, AL · Member since 2017 · 3 posts · 0 votes
    8y

    When we moved to our current home, I did some shopping for insurance. I think I have the lowest on the rental property, ie cash value of the rental property(premium is $650/yr), and opted for the umbrella insurance coverage in addition to circumvent the need for an LLC for the time being.

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  • Andrew B.
    Rockaway, NJ · Member since 2016 · 2k+ posts · 2k+ votes
    8y

    your property is generating negative cash flow every month. if you want to continue to invest in real estate, your best bet is to first determine if it will make money on a 30 year mortgage. if so, cash out refinance into that, generate cash flow, and use your money to buy more properties. if you only want to own one house as a "nest egg" to help you when retirement comes, and are risk averse, then you can keep it as is. one thing to remember is that equity stuck in your house is not earning a return, and would be better deployed elsewhere.

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  • Nathan Wayne
    OP
    Harvest, AL · Member since 2017 · 3 posts · 0 votes
    8y

    My goal is to own ~10 properties generating about $10,000 free and clear within the next 10 years, with a focus on getting there as soon as possible. Sorry for not including this in my initial post, I feel this is a key point in what should be driving my decisions.

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