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Hello All! I am stumped about my decisions here... I keep going back and forth, so I thought I would throw the scenario out there to some of you more experienced folks. Here's the deal:

I originally bought this property in 2005 as my primary residence for $151k... Since then I have moved and it has become a rental. The mortgage terms are TERRIBLE... 40 yr mortgage, adjustable, with a lower limit cap (the rate cannot adjust below 6.825%, which is where it is now).

I currently owe about $108k on the house. I attempted to have it refinanced last year but the appraisal came in soo low ($135k). It's been a while and my appraiser think the market in the area has rebounded, and I can bet on $145k now. If the house appraises for $145k that puts me right at 75% LTV, which is what I need for the loan to get approved.

My question is, should I go through with the refinance, knowing I will most likely have to pay all closing costs and potential interest buydowns out of pocket? Or should I wait for more equity in the home / the value to go back up? Of course, interest rates could go back up too... Refinancing today into a 30 yr fixed I would save abut $200/month on the mortgage payment ($870 down to $670). The property currently rents for $1250/ month.

Advice, comments, suggestions? Help?!

Thanks!

UPDATE:

I guess what I'm looking for is some sort of novel advice that I haven't yet thought of. Don't get me wrong, I *greatly* appreciate all the advice I've already been given, but I've already thought about the basic strategies of selling and refinancing as is with all the refi. costs coming out of pocket.

For example, last year when I had the property appraised it came in as "average" condition. The appraiser suggested I could do a few things to improve the exterior to get the property a "good" condition rating, which adds $5k to the value of the home for appraisal purposes.
I ended up spending $1,200 to repaint the whole exterior, and $800 for a new back deck. I spent $2,000 for a $5,000 boost in value, and I added to the desirability of the home.

Alternatively I could have just dumped $5k into the refi. to bring the house up the the needed value.

I'm wondering if there are any other "tricks" or ideas like the above that I haven't yet thought of. Only being in rentals for 3 years has left me lacking in the experience department.

This message has been edited. Last edited by: lmason,

Imason, welcome to the real estate boards!

Now, a disclaimer: I have no expertise in finance or tax laws (you definitely need to consult with a real estate tax CPA before doing anything) BUT, just as an individual, I did have some thoughts for you to consider.

Having an adjustable 40 year mortgage that cannot go below 6.825% would probably make me re-finance as long as the out-of-pocket expenses didn't exceed $5000 which you would re-coup in less than two years AND you would have the security of a shorter term loan with a fixed interest rate.

None of us know what will happen in the future re interest rates but we all know they are at historic lows right now. In addition, I am wondering if the re-financing costs might not be deductible since you are declaring it to be "investment property"? If so, for myself, think I would re-finance...

Find out the particulars re the tax consequences for the out-of-pocket costs and then make your decision - let us know what you decide.

ETA: I don't know what interest rate you are using for your calculations, but a quick glance at the standard mortgage calculators online show that $108,000 over a 25 year loan (5 years less than the 30) at even 5% would be $631.36 - an even greater savings...

This message has been edited. Last edited by: Idaho Resident,

Are you saying you need to have 25% down in the property to get the best rates and that because of the current appraisal number you do not have 25% down to get the best rates? May be you could shop aroung to various banks?
I read in the newspaper that banks are at a low interest rate now -- much lower than when we refinanced 2 years ago. Is there any chance you could make this your primary residence (move back in) and refinace with the record low rate?

This message has been edited. Last edited by: happy 9,

Idaho Resident-
Thanks for the thoughtful reply. I like how your put it in terms of "recouping the cost in a couple years". You are right, if I am saving $200/month on the mortgage, that $1200/year, and that makes the refi. cost not seem so bad. And by the way, The mortgage payments I was listing include my escrow for taxes and insurance, which is why they might seem high. I was using 6.825% (current rate) vs 4.25% (which is what I was quoted the other day)

kiwikiwi-
I need 25% down because that is the requirement for any investment property to get a loan. I wish I could move back there just to get the refi... investment properties also add around .25% to the interest rate... unfortunately the house is out of state and it's not an option for me.

What about selling if you don't plan on going back to home? If it could sell near what your appraiser seemed to feel($145k)its current worth is and you owe $108k, you might be able to put some dollars in your pocket and relieve yourself of the problems of being a landlord. I wouldn't count on prices appreciating that much in the near future, and I do think interest rates will be going up in the future.

Mamaspoon- That's an idea I have considered, but I think, especially with the refinance, the property will have good cash flow in the future. Right now it is renting for $1250 a month, even with my current mortgage of $870, it pulls a net profit, if I could bring the mortgage down to say, $650, it would be looking even better.
I am relatively new to the "passive income" investment strategy, but it is my ultimate goal to be able to live off my passive income. So in the end, I'd really like to keep the property as it helps achieve that goal.

I guess what I'm looking for is some sort of novel advice that I haven't yet thought of. Don't get me wrong, I *greatly* appreciate all the advice I've already been given, but I've already thought about the basic strategies of selling and refinancing as is with all the refi. costs coming out of pocket.

For example, last year when I had the property appraised it came in as "average" condition. The appraiser suggested I could do a few things to improve the exterior to get the property a "good" condition rating, which adds $5k to the value of the home for appraisal purposes.
I ended up spending $1,200 to repaint the whole exterior, and $800 for a new back deck. I spent $2,000 for a $5,000 boost in value, and I added to the desirability of the home.

Alternatively I could have just dumped $5k into the refi. to bring the house up the the needed value.

I'm wondering if there are any other "tricks" or ideas like the above that I haven't yet thought of. Only being in rentals for 3 years has left me lacking in the experience department.

I am no expert either, but I would consult a tax person first and then start shopping for a better mortgage for a refi. I think that I know where you are coming from and selling would not be what I personally would advise.
Morgages are like car insurances, they are all different. And yes the present interest rates is my belief, that they are the lowest rates that we will see.

lmason, I don't know your basis in the property so I don't know the tax consequences of selling the property. (For one thing, you needed to have an appraisal when you converted the property to a rental.) Besides that, I don't believe a public mb is the place to go over those details. I do agree that you need to consult one or more professionals.

My biggest question: why do you want to own a rental property in another state? Who's managing the property? What about those costs? Do you plan to return to that area at some point in the future? If you want to continue investing in rental properties and plan to remain in your current location for the foreseeable future, why not acquire investment properties in that area?

As investors, we value properties using an income method/cap rate or gross rent multiplier. No offense to all of my appraiser friends out there but personally, I wouldn't use an appraiser to determine the optimal and/or necessary improvements to a property. Yes, they're one source of information but WRT rental properties, the main consideration is, or should be, will this improvement increase rents and therefore add to the value of my property?

I commend you for keeping up the property, i.e. the painting, but that's considered maintenance. Things like that may help you rent the property slightly faster inbetween tenants but they don't normally significantly change your gross income and therefore, valuation. BTW, please don't skip the words slightly faster and significantly, above, folks.

WRT the deck addition - that's another nice improvement. Will it increase rents appreciably and/or significantly? IDK - let's say the comparable rental homes in your particular subdivision, neighborhood or town all have decks and charge roughly the same rent for similar properties. Then, in that example, no, you probably can not charge a higher rent. If you can increase rents b/c of the deck alone, it would probably be an insignificant amount, IMHO. Again, the home may rent inbetween tenants alightly faster.

Anyway, that's how investors analyze possible capital improvements. Unfortunately, many landlords (not all) don't properly maintain their properties, especially if they are located in rent-controlled areas. If a property becomes incredibly run-down and contains tons of deferred maintenance, in general, income and therefore valuation will be negatively affected. Rent control, however, is another topic altogether and JMHO so we'll leave it there.

WRT the appraiser's assessment of your property as average condition, IME, they classify most properties as average. Yes, you completed the painting but properties continually deteriorate over time. When your property is next appraised, other maintenance may be required so the property may again be classified as average. Maintaining an out-of-state property is more difficult and usually more expensive.

In addition, appraisals are subjective and basically only valid and relevant as of their specific date. Your next appraiser may focus on other issues so your property may again be classified as average. Incidentally, you should have also had an appraisal when you converted the property to a rental. (ETA: Oops, guess I repeated that - well, it's important.)

If you do want to purchase a rental property in your current area, one of the alternatives we would consider would be a 1031 like-kind, tax-free exchange. I don't know if it's necessary or even makes sense b/c I don't know all of your numbers but that's one item on our standard checklist for these types of situations. If you're interested, I'm sure your realtor can refer you to a broker who specializes in them.

All of this post, JMHO.

Best of luck -

ETA: lmason, forgot to mention anything about the deductibility of various costs, if you do decide to refinance. In general, you may deduct anything that's paid out of escrow and normally deductible, e.g. interest, taxes, hoa dues (if any), and hazard insurance. (BTW, don't add the interest unless your lender neglected to include it on Form 1098-INT.)

Certain other costs must be amortized over the life of the loan and still others must be capitalized. These vary (and it's past my bedtime, lol) so I'll let you consult your tax professional about those items. One word of warning, however - a frequent error is the treatment of local assessments. Many incorrectly deduct these as taxes but frequently some or all of them must be capitalized.

If you're investing in and operating/managing rental properties, I do hope you're working with a qualified tax professional.

FYI, JMHO.

This message has been edited. Last edited by: RErocker,