refinancing to generate positive cash flow keep or sale?? first deal help please

General Real Estate Investing
1

Hi everyone,

I am really stoked about this site it has helped me a lot to open my mind so know I would like some advise from the people here.

I did my first deal without much kwnoleadge (apart form buying cheap)but know I want to really get into deals and become an active investor.

A little of background, I am from a very stable country in South America (where I plan to keep investing) and currently live in Hawaii married to an American I am only 27.

Here is what I did:

I bought a 1B 1B apartment in the financial district of the capital city in SA to the family of a guy who died so I got a good price (US$62,000). The market price of the propery is around US$70,000. At the time it made really good sence as I lived in the place and I did not want to pay someone else mortgage.

My down payment was 16% (US$10,000) and I took a mortgage for 15 years which give me payments of US$420. Now that I rent it out I get $364. Taxes, ins, etc,are $60.

I am cash flowing negativly in my current 15 years mortgage.

I could refinance to a 30 year mortgage and have a little monthly positive cash flow or should I sell and look for other markets…

Numbers:

Purchasing price$62,000
Closing costs $2,800
Downpayment 16% ($10,000)
Rent roll $364mth
current mortgage 15 years $420mth
tax, insurance, etc.$60mth
Estimated new mortgage 30 years $300
Estimated sale price 70,000

So the question is should I refinance, should I just keep as it is or should I sell?

Personally I dont mind the small negative cash flow, but that restrict me in making more deals and I get less leverage, and I have to keep on being an employee!!!.. If I sell I can capitalize a gain but it seems that the area where the property is will contantly be adding in value so if I sell later I could capitalize a bigger gain (as long as I stop cash flowing negativly)…

There is not tax issues as there is no capital gains in properties in my country.

Any help wouldbe great as I want to keep investing and utilizing the advantage of knowing both countries.

Rafael

2

Rafael,

First, let me congratulate you on actually stepping off the ‘fear’ platform onto the REI train. Most people never do.

Now, that said, before you decide to make another move, you really need to learn what a deal is, and is not.

Buying at just slightly less than 90% of retail is NOT a deal, that’s simply making a good retail purchase. IF you are wanting to be a RE investor, then you need to be looking for real deals. By that, I mean that you should be paying no more than 80% of retail AFTER ALL costs have been figured into the deal and better still to be at 70% or lower.

As a rental, your property is sucking you dry. To truly cashflow with your current mortgage you’d have to be renting it for $850-900/month once you figure in ALL costs associated with rentals. So even if you refinance, you won’t truly be making a monthly profit.

If you’re looking for opinions, I’d sell it and move on to the next deal.

Raj

3

Thanks Raj, I knew I was going to get into this, it wasnt that hard has I have little adversity to risk and the amounts involved where not much compare to my expenses and what I was making… anyway this does not mean I want to keep on doing things wrong so I am here…

I inderstand now that I did not make a deal and that is the past so I am looking forward to the future.

I have a grea tenant in the property and it just came to my mind that I could suggest a lease option to him, hopefully by this I will put the cash flow in positive get some cash form the option and sell if he takes it or sell at the future value once he decide to move out etc.

Is there any good way to aproch him where he really gets the value of the deal…what numbers should I run???

Anyway it is just an idea that came to my mind and maybe an alternative so any comments are fully apreciated…

On another topic I think I actually confussed 2 terms, I bought the property (speculating) more in the tough of the appreciation potential (location) than to generate a positive cash flow, but know that I am learning I dont know if did the right thing… does anyone invest keeping negative cash flow just by the potential of the appreciation? or I just did a beginers mistake?.

4

I don’t know your market at all, so everything I say is pure guesswork. However, that said, it sounds like that either your rent is way below average rents or your property values are way higher than most could afford to pay. Reason is, based off your numbers, you should have about a 5.3% interest rate or so on your loan, yet you can’t cashflow. With rates like that, you should be able to at least breakeven with your cash on cash monthly even if you paid full retail.

And yes, some people buy props based solely on the possibility of strong appreciation, however, that is not investing, that’s speculation. There is a major difference. Good speculators still don’t buy things on a whim. They research the area, and have strong data that supports their theory that the market or area (or property) is due for a major upshift of value.

Raj