A little while ago I mentioned that I was looking into refinancing some of my rental property. I figured that interest rates had gotten so low it was worth looking into and seeing what might happen. I think there is only one way for rates to go and that is up. Well, life got in the way and I had to get some other things done first as I am sure that most of you know. But now, I have been able to begin looking into the refi again.
It turns out that the mortgage guy at the bank left so I am with a new guy. I have only spoken with him on the phone, but I think I like him better. He is fairly responsive, and I think we can get this done.
I made myself a spreadsheet at the end of October with the data from all 6 of my rental houses. One is the place we used to live in before moving 12 years ago. We have a second mortgage on it so there is not a lot of equity. But the other 5 are the ones that I will be able to refinance. I figured that while I was decreasing the interest rate, I would also look into decreasing the term.
Currently, my rates run from 6.38% to 7% with remaining terms of 21 to 23 years. I had him look at 20 year and 15 year numbers, and I am liking what I see.
For the 20 year term, the interest rate would be 4.25% and I would have to bring just over $13,000 to closing. The payments would decline by about $948 per month. It would take about 14 months to break even and get my cash back.
For the 15 year term, the interest rate would be 3.125% and I would have to bring $10,500 to closing with payments being reduced by $659 per month. It would take me 16 months to get the cash expense back. But I would save 5 full years of payments at the back end compared to the 20 year mortgage. And I will definitely save a bundle compared to my current situation.
The savings could be used to pay some of my other debts which I am working aggressively to get under control. Right now, that seems like the best use of cash right now. I would prefer not to bring that much cash to closing, but consider the return on investment, and it is a great deal. If over the first year, I save $7908 in cash on my $10,500 investment now, my cash on cash return is just over 75%. Who wouldn’t take that kind of return on investment? So it makes abundant sense to get this thing done.
Which is why I hoping the refinancing on the rental houses all works out.
Maybe I am exaggerating a little, but it seems like every blogger that I read is getting into real estate. As a landlord myself, I can’t help but notice these things. It makes me wonder what the implications might be. I suppose it could mean that the price of real estate is nearing a bottom and that now is a good time to get in. Just check out all the bloggers that are getting into the landlord business:
Philip Taylor at PT Money is planning on renting out his home. This is actually the way that I got into real estate. Our first home would not sell and needing some extra room after kid number 6 was born, we were looking for something bigger. In order to do that, we could show the income from renting on the mortgage application which cancelled out that expense. It has been an interesting experience.
Crystal at Budgeting in the Fun Stuff is building a new house, renting the old one, and may just take in boarders. It sure will help offset the cost. Too bad I can’t charge my kids rent, yet. I suppose if they bounce back, I will be doing just that.
Money Reasons is checking out the possibility of investing in real estate. Sounds like a duplex may just be in the cards. I would be cautious in a town with only a few major employers. One of them goes out of business, and the vacancy levels skyrocket, homes are foreclosed and property values drop.
Sandy at Yes I am Cheap even got money from her 401(k) to buy a second property.
Like I said, I am not sure what this all means. I do know that I would like to own some more real estate. Is it something about having an investment that you can touch and see? Is it because most people get the concept of owning property and renting since we are either a tenant, own a home, or are a landlord?
My Real Estate Philosophy
For me, real estate is a long term investment. It should all be paid off in my mid-60’s even if I don’t end up trying to pay off the mortgages early. Then the rents will be used to replace income from working allowing stock investments to grow as long as possible before having to take mandatory withdrawals.
To protect my investment, I have insurance which protects me from natural disasters just like you would want to have on your own home. There is also provision to replace lost rents should anything happen.
In the short term, my goal is to simply break even on cash flow and allow the tenants to ultimately pay for the mortgage. Unfortunately, there is a lot of excess housing supply in my area and rents can’t be raised. In fact, the general trend has been negative, but I have been able to stand pat. It has been that way for the past decade. I consider myself fortunate that I have decent tenants.
Maybe someday, I will go into more detail about my real estate experience. In the meantime, I am sure that there will be plenty of real estate discussion in the blogosphere since it seems like everyone is getting into real estate.
Are you looking to invest in real estate?
These are the carnivals in which my blog has appeared this past week:
I read this article earlier today stating that in 98 of 100 of the top housing markets, buying is cheaper than renting. I remember when buying was incredibly expensive in many cities compared to the median income of the area. That signaled the top of the market. It wasn’t long before the bottom fell out and there was no demand. Now I have to wonder if the bottom of the real estate market is near. Of course it could be another year or two before there is an increase in housing prices, but if it doesn’t make financial sense to rent, then that says something.
If nothing else, it means that investing in real estate makes sense for investors who have the money and can turn around and charge rent to those who are unable to get mortgages. Mortgage rates are near record lows which is another good reason to purchase a home.
I remember growing up listening to my dad mention the mortgage rate of 12% that he was paying on the house where we lived. From there I remember interest rates increasing into the late 70’s when you could get up to 8% on a passbook savings account. As a result, I considered myself quite fortunate to get a mortgage for less than double digits when it came time to purchase my first house.
I also remember those days as being before the internet. In order to see the impact of interest rate changes, you had to have a book and look at tables unless you were a financial professional with the nifty financial calculator. But now, there are awesome mortgage calculators online that can be used to run all sorts of down payment and interest rate scenarios instantly.
With interest rates so low, this could be considered a once in a lifetime opportunity to purchase some real estate. I wouldn’t worry about trying to time the market since the fact that renting is more expensive would suggest to me that renters will start looking at ways to get away from that option. There is still a substantial portion of the population that desires to own a home.
In fact, I have a long term renter (about 3 years) that informed me earlier this month he had purchased a home and would be moving out. Of course, I am not excited about losing a tenant and having to rent the place again. But I am happy for him that he can finally afford to get his own place. Besides, we always have someone looking to rent from us and have a few prospects already. I bet that it can be rented without having to run an advertisement in the local paper.
One of the great things about the internet and Facebook is that my wife is able to keep tabs on lots of friends or acquaintances that might be looking for a place to stay. We are often contacted about openings that we might have. Unfortunately, we are not in a position to purchase ourselves and take advantage of the low interest rates.
Instead, we are working at paying off debt and are hoping that while the housing market is bottoming out, it takes several years to really pick up steam so we can buy low and eventually sell high.
- Existing home sales signal rebound that is real (zerohedge.com)
- Mortgage Rates are Near a 60-Year Low (brendanfrey.wordpress.com)