Home Buying/Refi Question - Need Opinions

[arielroux]

Hi All! I'm sourcing to get opinions as I've never been fortunate enough to be in this position before.

I currently own (via mortgage) a townhouse. I am 6 years into a 30 year term. I bought this on my own after my divorce as it was perfect for me as a singleton - Rate on the mortgage is 3.50%.

I am now engaged, FI lives with me, and we both now WFH permanently, so we are looking at buying a single home with some more space sometime this summer/fall.

I currently do NOT intend to sell my townhouse, instead I'd like to keep it as an investment property and rent it out. We have enough between the two of us specifically allotted to cover a 20%+ down payment on our next home based on our desired budget. The rental market in my neighborhood would cover my current mortgage payment, and leave me a few hundred "extra" in profit per month.

When I bought this house, I purchased for $220K. Homes in my neighborhood are now selling for $280K-$330K. I think my home value would be closer to the $280K range as I do have one of the smaller models in the development.

Here are my questions:

1) Should I look into refinancing the townhouse to a lower rate since I intend to keep it and rent it out?

2) Will a refi have any kind of negative effect on an approval for a new mortgage in the next 3-6 months? (I'm not worried about my credit, in general, as I have an excellent FICO score).

3) Should I consider selling since the value has increased so much? I do like the idea of having an investment property, but it's also still on a mortgage, so it's not like I own it outright.

I'm really torn, so any comments are appreciated. You may even have a better suggestion that I haven't thought of!

[littlemisssunshine]

I'm pretty risk adverse and I'm a licensed real estate broker with a background in property management. However, I would lean towards keeping it. It would be a solid investment with a steady stream of income. I don't see the market cooling any time soon based on current demand and I see the rental market staying strong as would-be buyers are priced out of the market due to skyrocketing home prices and even increasing material costs keeping them out of new construction. However, I would not count on any "profit" from the house. Your insurance will probably go down (you insure only the structure not contents of a rental) but your taxes may go up as your no longer qualify for any homeowner's exemption). You will also have increased maintenance issues and will have some minor to major repairs and renovations needed between tenants. Will you hire a property manager or do it yourself? A PM will typically take 10% of the rent for management. You also need to consider the tax implications of rental income. Also consider the loss of income if you have a vacant rental for a month or two but still need to pay the mortgage. With all those expenses in mind, I would keep any additional money made after paying the mortgage and escrow it in a separate account. Build it to 5-8k and then I would feel comfortable keeping any profit for personal use.

You have a really good rate now, and unless you keep the place for 5+ years you probably won't break even on any closing costs. I would hold off on refinancing for now. Also, rates are different for owner versus tenant occupied, so you may not get a substantial decrease in interest rate that you were expecting.

And with the market so hot, even if you have a horrible string of bad luck and have a tenant trash the place you could still sell it at as is at a reduced price and still walk away with a tidy profit. I guess I don't really see any financial downsides in keeping it as a rental. However, it is emotionally and mentally taxing to have a rental, especially one you used to live in. It will be another 'chore' to deal with. I've also experienced clients have difficulty adjusting to the idea that their once personal home is now a rental and needs to be treated like a business. Tenants aren't going to treat it like you do, and that can be difficult for the owners.

Anyway, if you have any questions about rentals or property management I'd be happy to answer them!

[chpmnk1015]

I would say refi while you are still in the house.. so its not a second home.. you should get a better rate...

[simpsongal]

Having a rental property is A LOT. I know there are other threads on this, but once you take care of routine maintenance/property management/taxes on the rental income etc. there's probably not going to be much left and the condition of your property will likely deteriorate from having renters. Given the bare numbers you posted, I don't think it would be worth it. I would absolutely sell the townhouse and buy a new home w/your FI.

[puppylove64]

Refi now while you live in it. After it isn’t your primary residence, you usually have to have 20% equity or 20% down.

Having a rental was a pain in the ass for me and I hated it. However, if you are interested, it doesn’t hurt to try it for a year or two. You can always sell later. If you think you might sell it, do so within 2-3 years so you can still deduct your gain since it was your personal residence 2 out of the last 5 years

[aspentosh]

For sure refi before you move. Rental properties will have higher rates, so to get the best rate you want it as a primary residence.

First question- will you be local and doing management yourself? Or will you be paying someone to oversee all the rental activities? I ask because that will quickly eat up any profit you might have from a rental, and I highly recommend having a large e-fund specifically for rentals.

We rented our first TH out of necessity. Property values didn't rebound and we weren't going to make enough to payoff the mortgage. So went rented for just over two years. We were VERY lucky and had great tenants that stayed the entire time. They weren't needy and didn't destroy the house. Because of that, I would think about doing it again. But we were 15 minutes away, didn't pay a management company, and were able to cover our expenses and mortgage with their rent.

[arielroux]

Apr 29, 2021 9:37:18 GMT -5 aspentosh said:

For sure refi before you move. Rental properties will have higher rates, so to get the best rate you want it as a primary residence.

First question- will you be local and doing management yourself? Or will you be paying someone to oversee all the rental activities? I ask because that will quickly eat up any profit you might have from a rental, and I highly recommend having a large e-fund specifically for rentals.

We rented our first TH out of necessity. Property values didn't rebound and we weren't going to make enough to payoff the mortgage. So went rented for just over two years. We were VERY lucky and had great tenants that stayed the entire time. They weren't needy and didn't destroy the house. Because of that, I would think about doing it again. But we were 15 minutes away, didn't pay a management company, and were able to cover our expenses and mortgage with their rent.

I will be local and had planned to manage it myself. FI currently has a townhouse that he owns outright and rents. He manages it himself and has had a really smooth experience (he could just have a great tenant, and I may not be that lucky, so I fully acknowledge that).

We are also fortunate enough to have family members nearby who are very handy with plumbing, electrical, and general household projects, so I think I'd want to try to manage it on my own, at least for a little while to see how it goes. My home is in good condition and doesn't currently need any repairs, but I realize this could change at any time.

I'm just so torn on what to do. I see benefits to both avenues (renting and selling), but I need to make a decision soon because if I decide to rent, I need to do the refi (if I'm going to do it) and I need to start the process of getting a landlord permit from my township and getting approval from my HOA to rent.

[arielroux]

Apr 29, 2021 10:26:13 GMT -5 melmaria said:

Definitely refi before you move, if you're going to keep it. We just refi'd both our home and our rental property, and we couldn't get as good of a rate for the rental (2.875%) as we did on our primary home (2.5%).

I'm in a similar situation in that the income from our rental property nets us a few extra hundred each month after paying mortgage/HOA, but we don't really *live* on that/factor it into our "regular life" budget - we save it for rental expenses/repairs that come up, taxes, insurance, etc. '

But, so far, renting has been worth it for us because (1) we live close by, (2) my H is incredibly handy and can fix almost everything himself/we manage everything ourselves except for major repairs (like when we replaced the furnace/HVAC), (3) we've been able to be really picky about tenants (have always hired people with high credit scores, good references, etc.), and (4) we don't have an immediate need for the money that selling it would get us (it's currently worth 2X what is left on our mortgage). We're playing the long game with our rental property and consider it part of our retirement investment/plan. But if any of those factors were to change, we would definitely consider selling it.

This is a pretty similar situation to mine, I think. We would live close by, FI isn't handy, but a ton of family is, I would be picky about tenants (the tenants who generally rent in this development are families with young kids as we are walking distance to the elementary school, and this is one of the last few "affordable" developments in the school district...everything else is McMansions these days), I like the idea of having a bit of an income stream once I retire (if I were to keep it that long), and I don't have an immediate need for the profit from selling.

This really helped to put some things into perspective...Thank you!