I’m struggling with the idea of selling a rental property that has both a high monthly maintenance fee and a high mortgage rate. The costs to keep this house are currently higher than the monthly income it generates.
I recently refinanced in order to pull out $100,000, so now I owe $420,000 on the property, which is worth approximately $750,000.
My recent refinancing increased my mortgage rate from 5.14% to 7.9%, essentially eating up all my cash flow.
I’m on the fence. Should I sell, or should I refinance for a better rate to free up cash flow?
Losing Money Fast
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Losing,
The fact that you’re bleeding money from this rental is not good. You need to either bring down your interest rate or raise rents so you can turn a profit in order to make it a worthwhile investment. But keep in mind that many people are sitting on the sidelines waiting for interest rates to fall, so you might not get your desired price if you decide to sell.
Your mortgage rate is likely the biggest reason your monthly costs have jumped so much. Rates are expected to fall to around 6% or lower by the end of the year. You could refinance then, but do the math to see if it’s worth it.
You’ve already been through the wringer with refinancing, and you likely paid various application, appraisal, attorney and origination fees — in addition to closing costs — to extract that $100,000. All of that is expensive, and now you’re thinking of going through it again.
Even if you refinance again at a lower rate, would that be enough to make a profit? Were you able to turn a profit on that property when rates were at 5%? If not, would you be able to raise rents for your current tenants or perhaps find new tenants who would be able to pay more? And is the house in need of repairs or upgrades?
Unless you can make a profit on the property in the next couple of years, there’s little reason for you to hold onto it, unless you believe that it’s in an area that will experience a significant appreciation in value — you’d want to see appreciation of 20% or more, given the fees you would have to pay upon selling.
Part of your retirement plan
At the same time, a second property is nearly always a good investment. Do you think there will be considerable demand for the rental in the medium to long term? Is it in an area where you might be able to find tenants who would pay enough to cover your costs in the near term so you can at least break even? If so, it’s a good idea to try to hold onto the property, especially if it’s part of your retirement plan.
Provided that you have enough savings to help you get through this current era of 7% rates, and you have the money to refinance down the road to get your monthly costs down to a level where you can have a healthier cash flow, it may be worth keeping the home.
Selling isn’t an easy or simple decision. Because this is not your primary home, you’ll need to factor in the capital-gains taxes you would have to pay, along with 6% in real-estate commissions.
If you do decide to sell at some point in the future, you could roll that money into another like-kind property in order to qualify for a 1031 exemption, in addition to a lower rate.
The bottom line: You need to think like a real-estate investor and leave emotion out of this decision. If the property is not making money or it’s not going to at least break even at some point, you have your answer. But keep in mind that the real-estate market can surprise on the upside and that once you sell the home, you will not be able to take back that decision.
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The numbers: Home prices in the 20 biggest U.S. metros rose for the 11th month in a row and hit a record high amid a persistent shortage of resale homes for sale.
The S&P CoreLogic Case-Shiller 20-city house price index rose 0.2% in December compared to the previous month.
Home prices in the 20 major U.S. metro markets were up 6.1% in the last 12 months ending in December.
A broader measure of home prices, the national index, rose 0.2% in December and was also up 5.5% over the past year. All numbers are seasonally adjusted.
The 20-city and the national index are at an all-time high.
Key details: San Diego posted the biggest year-over-year home-price gains in December. Prices were up 8.8%.
All 20 major markets reported yearly gains for the first time in 2023, S&P said.
Home prices rose the slowest in Portland, increasing by 0.3%.
Cities | Change from last year |
Atlanta | 6.3% |
Boston | 7.2% |
Charlotte | 8% |
Chicago | 8.1% |
Cleveland | 7.4% |
Dallas | 2.1% |
Denver | 2.3% |
Detroit | 8.3% |
Las Vegas | 4.2% |
Los Angeles | 8.3% |
Miami | 7.8% |
Minneapolis | 2.9% |
New York | 7.6% |
Phoenix | 3.8% |
Portland | 0.3% |
San Diego | 8.8% |
San Francisco | 3.2% |
Seattle | 3% |
Tampa | 4.1% |
Washington | 5.1% |
Composite-20 | 6.1% |
A separate report from the Federal Housing Finance Agency also showed home prices rose 0.1% in December from the last month, and were up 6.6% in the past year.
The FHA also noted that the housing market has experienced annual home price growth every quarter since the start of 2012.
The median price of a resale home was $382,600 in December 2023, and a newly built home was $413,200.
Big picture: Even though rates went to 8% in 2023 and dried up demand, that did not push down home prices significantly, per the Case-Shiller index. However early analysis of the data indicates that some markets are seeing home price declines.
But with the 30-year dropping below 7% in December, home prices may see a boost as demand picks up. And with a persistent and severe shortage of homes for sale, home prices could be pressured upwards again.
What S&P said: “Looking back at the year, 2023 appears to have exceeded average annual home price gains over the past 35 years,” Brian D. Luke, head of commodities, real & digital assets at S&P Dow Jones Indices, said in a statement.
“While we are not experiencing the double-digit gains seen in the previous two years, above-trend growth should be well received considering the rising costs of financing home mortgages,” he added.
And the company said it was able to see the early impact of higher rates on home prices. “Increased financing costs appeared to precipitate home price declines in the fourth quarter, as 15 markets saw lower values compared to September,” Luke noted.
The numbers: Home prices in the 20 biggest U.S. metros rose for the tenth month in a row and hit a record high due to a low number of listed homes.
The S&P CoreLogic Case-Shiller 20-city house price index rose 0.1% in November compared to the previous month.
Home prices in the 20 major U.S. metro markets were up 5.4% in the last 12 months ending in November.
A broader measure of home prices, the national index, rose 0.2% in November and was also up 5.1% over the past year. All numbers are seasonally adjusted.
The 20-city and the national index are at an all-time high.
Key details: Detroit posted the biggest year-over-year home-price gains in November. Prices were up 8.2%. The city was the best performing real-estate market for the third month in a row.
Portland was the only city which saw home prices fall in November.
Cities | Change from last year |
Atlanta | 5.9% |
Boston | 7.1% |
Charlotte | 7% |
Chicago | 7% |
Cleveland | 7.4% |
Dallas | 1.7% |
Denver | 1.5% |
Detroit | 8.2% |
Las Vegas | 2.1% |
Los Angeles | 7.2% |
Miami | 7.2% |
Minneapolis | 2.7% |
New York | 7.4% |
Phoenix | 2.5% |
Portland | -0.7% |
San Diego | 8% |
San Francisco | 2% |
Seattle | 1.6% |
Tampa | 3.4% |
Washington | 4.7% |
Composite-20 | 5.4% |
A separate report from the Federal Housing Finance Agency also showed home prices rose 0.3% in November from the last month, and were up 6.6% in the past year.
Big picture: Even though mortgage rates were elevated between October and November — which sapped home-buying demand — the persistent and severe lack of supply of homes for sale has resulted in prices rising yet again.
With an imbalance between demand from home buyers and a reluctance among homeowners to sell and give up their ultra-low rate, the dynamic is likely to persist.
Particularly since rates have fallen since November and demand has ticked up, home prices will likely continue to march upwards into the new year.
What S&P said: “November’s year-over-year gain saw the largest growth in U.S. home prices in 2023, with our National Composite rising 5.1%,” Brian D. Luke, head of commodities, real and digital assets at S&P DJI, said in a statement.
Most markets are seeing home prices grow, he added. “The days of markets in the South rising double digits with markets in the Midwest remaining flat are over,” Luke said.
And with mortgage rates falling since November, that could “support further annual gains in home prices,” he added.
Looking ahead: “With mortgage rates now lower and spring home buying demand already lurking, home prices will continue to rise,” Selma Hepp, chief economist at CoreLogic, said in a statement.
That’s “especially considering the outsized pent-up demand for homes coming from young buyers, those who have been waiting for lower rates, and huge influx of immigrants over the last couple of years,” she added.
Market reaction: Stocks
DJIA
SPX
were up in early trading on Tuesday. The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
was over 4%.