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Refinance to create positive cash flow?

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  • Refinance to create positive cash flow?

    I am new to the WCI community, wish I would have found it 9 years earlier. I still own my house from residency and the rent currently equals the mortgage payment, I have 7 years of payments left on a 15 year mortgage at 3.62%. The current cash flow is about negative $2000 a year when taking into account maintenance, insurance,etc. and because we have long term tenants I don't have plans to significantly raise the rent as they have been great tenants and it is close to market rate. I have been considering refinancing for another 15 year mortgage at a slightly lower rate in order to create positive cash flow on the property. I could use the additional income to pay toward my remaining student loans (though these are at a lower interest rate) and also give me an alternative income stream given that my salary is going to be down up to 50% for the rest of the year. (I should be able to survive the salary decrease given 'living like a resident' now and having an emergency fund though it obviously significantly affects long term financial goals.) I am torn between the desire to get debt free as soon as possible and extending the mortgage would delay this, but also want to be smart about my money working for me and would like to be able to purchase another rental property in the next year or so. Thanks for any insight or advice.

  • #2
    3.6% isn’t bad on a rental property. You might do a little better, but it will take several years to break even after paying the transaction costs (state dependent) and worse you are adding 8 years to the mortgage. While refinancing is not obviously wrong, without seeing the numbers I doubt you will be making yourself money by doing so. Just me, but if you can make it on your salary and the rents are break even, let it ride.

    There is a strategy I might consider, but it has some risk. Given your desire for another property in a few years you could: refi with a 5/5 ARM. Rates will be 2.5% or something like that. Probably cash flow positive and break even in a year. Plan to sell it on a 1031 exchange in 3-5 years, and reinvest in two properties that are cash flow positive (1% rule and all that). The risk of course is that you can’t sell in 5 years and rates go up.


    • #3
      Rental property APRs are typically higher than for primary residence. Are you sure you’ll be able to beat that rate?

      You are keeping track of all these losses, including depreciation expense, on your schedule E and 8582, right?


      • #4
        You said you want to be smart and make your money work for you but it hasn't been for 9 yrs now. You are $18K in the hole! I would sell it as it has probably appreciated some and then buy a property that will have positive cash flow.


        • #5
          Why don't you sell it now?!?!

          And yeah, I don't think you'll get a better rate - given that it's a rental.


          • #6
            “ I don't have plans to significantly raise the rent as they have been great tenants and it is close to market rate.”
            You are losing $2k and only mention your cash flow goals. Stop the bleeding, one way or another.
            Sell it.
            THEN decide. How much equity can you pull out?
            Your choice, pay debt or reinvest.
            Sure you may have some tax recapture or you may do an exchange. You current approach is subsidizing housing digging a deeper hole. Stop the bleeding.