How do I turn my property cash flow positive?

[Bill Brady]

My wife and I are in the beginning stages of planning our road to wealth via the real estate train...we're hoping to buy our first true investment property within the next month or two under a "buy and hold" strategy. I say "true investment property" because I already have a tenant occupied single family home that was, at first, my primary residence and, as the subject heading implies, I'm losing money on it.

Here are the facts:

I bought the home in Oct 2002 for $123,000 at 100% financing through an FHA loan with a 6.375% interest rate.

I owe right at $100,000 on the mortgage.

Mortgage payment with PITI + PMI = $975 per month.

Tenant pays $895 per month under a 3 year lease-purchase agreement for the asking price of $129,000 (in which, I think he'd be an idiot to buy the house at that time but let's not rule it out). We're only 3 months into the 3 year agreement.

I have a property management group managing the property for me for an 8% fee ($72 per month).

There have been a lot of foreclosures in the neighborhood that have been purchased around the $60k - $70k range and are being rented out for $100 less than mine.

My intention when I moved out was always to sell it, however, with the market the way it was in rural America, that just wasn't an option for me. Now that I'm 10 years into the mortgage, I figure that I should hang on to it for a while longer until at least when the market turns around but I'm trying to find a way to make it cash-flow positive or at least neutral if that's at all positive. I've research all over the place and can't find an answer and am finally turning to the experts.

Any advice?

Does it make sense at all to refinance IF I could with a lower rate?

All help is appreciated!

[Corey Dutton]

If you could refinance at a lower rate I think this would be a good idea, since you are indeed renting it now.

Also, why do you need property mgmt when it's just one house? Do you live in another City now, or are you close by? These two items may save you around $150 per month.

[Bill Brady]

Thank you for the quick reply!!

Yes...I live about 40 or so miles away from the property and can manage the property...but I wasn't able to show the property to potential tenants myself and needed to hire the property management company to help out. I've got to keep them for another 10 months or so.

[Teresa F.]

Hi Bill -- Just an FYI for future purchases, most Realtors and many property management companies will show your home and help you find a tenant for a flat fee. In my area (Washington DC) it is typically one month's rent.

[Bill Brady]

Thank you! I realized that but figured, being that I was so far away from the property, it would be easier to just have them manage it for me. Come to find out, there really isn't anything (at this point) that they're managing except for collecting the rent. Being that the tenant is on a 3 year lease purchase agreement, I might eat the costs this year and cancel with the property management company.

[Chris Masons]

Hi Bill,

Do you plan on keeping this house for the long haul and have it end up being one of yoru properties in yoru investment portfolio?

If the answer is yes, then I think it makes alot of sense to refi, you should be able to get a much lower rate and amount financed will be less so that should definitely get you into positive cash flow territory.

Biggest concern I would have is the appraisal. They are tough these days and for investment property the lenders max ltv is around 80%

But if you plan on selling when the market comes back it may not be worth it to refi although it still may make sense.

Chris

[Steve Babiak]

Some realtors will do the placement for 1/2 month's rent near me; I guess this will vary by the general area. But I don't use realtors for that, since I am more than capable of handling my own showings and screening.

A refi might be an option, but now that it is a rental, you won't get that FHA low down and your interest rate will be non-owner occupied. Mortgage rates 10 years ago were decent, although higher than what is available today. The second challenge to a refi is it sounds like you are underwater here, where the houses that are similar sell for a lot less than what you owe. Look into the possibility of a refi, but I doubt it will happen for this case.

And you haven't been at this long enough to have been hit with many of the other expenses that reduce cash flow, so there isn't much of that to be lowered at this time. But you can expect your cash flow to worsen if / when you encounter some of the expenses that tend to be overlooked (for example: vacancy, eviction, legal, accounting, certain capital items like replacing heaters and roofs).

You can hope that rents will start to increase I guess, but with a 3 year lease you are sort of locked in even if that were to happen in your area. Hope that this tenant takes good care of things, and that your rent gets paid on time, and that they eventually buy. Maybe somebody else has some further ideas.

[Bill Brady]

Thank you, Chris and Steve...good information. My concern is most definitely the appraisal. Rural GA was hit harder on the mortgage defaults so I doubt, even 10 years later, that I'm a true 80% loan to value. I am planning on holding onto this for the long-haul...the tenant agreed to a 3 year contract with 3% annual lease increase so that will eventually help out. Given the cost to refinance, it looks like I'll just have to suck up the negative cash flow and take a look at it again next year and manage the property myself. I think by doing that, I should be able to break-even from the month to month mortgage side of things and will just have to pay maintenance expenses out of my own pocket.

Thanks for the help!!

[Mike H.]

Just wondering, but have you considered contesting the taxes?
I'm trying to do the math on the your numbers to figure out how much your paying in taxes and I'm not sure it will save you much.

Based on your interest rate (6.375) and loan amt (123k), I'm showing a monthly payment of $767. Add in PMI ($80 for 100% loan?) and insurance (500 so 40/mo?). That means your taxes are next to nothing. I'm guessing on the PMI and insurance but wow, $1,200 a year for taxes?

Still if you can knock that down 30%, you'll be saving $25 a month.

One other thing. Your PMI is due to be removed very soon. You can request it to be removed at 80% of the original loan. But by law, they have to remove at 78%. That should save your PMI in another year or so, I think. (80% of 123k is $98,400 so you're only $1,600 away).

"What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI."

Tax savings: $25/mo
PMI savings: $75/mo (just guessing on your PMI
Prop mgmt savings: $67/mo

You'll be getting closer. Then if you actually could refi it,
you 'll be in business.

[Bill Brady]

Mike - You are dead on with the math and didn't even think about contesting the taxes...I appreciate the direction. As far as PMI goes...I was told that PMI would be removed once I hit 80% loan to VALUE and not off the original loan. Is this incorrect?

GREAT information...thank you so much!

[James H.]

Can you save any money refinancing the house you live in? It might not be money coming from the rental house, but at least it's coming from somewhere. FHA has a bad *** refi program right now (if you live in a FHA financed home). No credit check, no income verification and no appraisal required. The lender will have some overlap requirements, but it is enabling me to refi my house where as I couldn't quite make it happen a month ago. Also, a 0.01% up front PIM and 0.55 PMI. THis only applies to FHA loans taken before 2009.

[James H.]

Originally posted by Bill Brady:

Mike - You are dead on with the math and didn't even think about contesting the taxes...I appreciate the direction. As far as PMI goes...I was told that PMI would be removed once I hit 80% loan to VALUE and not off the original loan. Is this incorrect?

GREAT information...thank you so much!

Last time I asked, I was told is was after 5 years AND 80 percent of original loan, thus an appraisal would not be required. You should call and ask. Check insurance rates too. You can save money with a cash value insurance as opposed to a replacement cost insurance. That's what I do with my rental, but I might not want to if it was a more expensive house like yours. Just depends on the situation.

[Bill Brady]

This forum is the BEST forum I've been on....and the only one that has people respond to it with intelligent advice...thanks to everybody so far.

Great idea, Brian....I have a VA loan with my current house and just bought it 3 years ago. The numbers just don't work out with it just yet. If I can get rid of the PMI I'll be very happy.....$80 per month for 10 years is a lot of darn money I've wasted. Ah how young and dumb I was...LOL

[Bill Gulley]

Actually, you're both right, 5 years (to 80% of the loan amount), additional payments to pricipal made you may apply and 80% LTV with an appraisal, say if you added on to a home of did significant updates. The law is 80% LTV, it may have been expanded as falling home values may have put some that didn't require MIP or PMI above 80% LTV, but they can't go there now. I have not heard of any PMI being dropped off a loan based on the LTV considering the drop in values but I guess you could push it if you have an appraisal.

But here is another issue of you losing money on this deal, what's the credit being given in the lease-purchase arrangement? You said it was rented for 100 bucks more than most others. The buyer's lender will only credit what is paid over the fair market rents in that arrea as that figure is assigned by the appraiser at that time. If the buyer is getting a credit for 200 bucks a month, when it's time to buy they will be $3,600 short for the LTV for the purchase money! If it's 100 dollars a month you may be on track.

Using a Realtor for that sale at 129K will be putting you in a position to bring cash to the closing I would imagine, commissions, purchase credits of 100 bucks a month puts you under without closing costs considered.

Who advised you in this deal?

You maight refi, get the taxes down, fire the mgt company and hope that the tenant will take care of things if they are in the frame of mind of a buyer. I think you're stuck.....Good luck...

[Ren Ver]

Hi, SO many homeowners are in this position due to market conditions, not irresponsibility. First, if you can afford to wait the market out and eat the 100-150 a month differential. DO THAT.
If the negetive cash flow each month is killing you and you want to refinance, you should know that a fee appraisel is not the same as a purchase appraisel. The banks are even much more conservative on a fee appraisel (refi) TRUE. ....
I would not even consider trying refinancing. As I understand your posting, you do not live in the home now, so for purposes of refi it is considered an investment, and the rate/ratios/qualifications will be much different. . The declining market in your neighborhood will greatly influence the appraisel and from what you posted it sounds like the declining prices are influenced by shortsales and REO properties. This is very common for 0 down FHA buyers in neighborhoods built (2000) forward. (at least where I live)
From a basic real estate standpoint, you are in a short sale position right now.

[Bill Brady]

More good information, Bill...thank you. The tenant is getting a $100 credit per month...my agent advised me on the deal and was the best offer I got. My intention was to sell the house completely but couldn't make it happen.

Ren - I'm in a short sale position, yes....but, besides me not wanting to contribute to the American problem as well as wanting to keep my 800-ish credit score, I'd rather not go this route. $150 per month isn't killing me by any means...I just don't like losing money unless I'm in Vegas :)

[Ren Ver]

Yea, none of us like to loose $$. Declining market is a drag