I’m losing money on my rental property, which has a $420,000 mortgage and a 7.9% interest rate. Should I sell?

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 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 rate, or raise rents, and 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 may not get the desired price if you decide to sell.

Your mortgage rate is likely the biggest reason why your monthly costs have jumped so much. While rates are expected to fall to around 6% or lower by the end of the year, you could refinance, but do the math to see if it’s worth it.

You’ve already been through the ringer refinancing it, and likely paid various application, appraisal, attorney and origination fees — in addition to closing costs — to extract $100,000. All of that is expensive and you’re thinking of going through it again. 

And even if you refinance, would that be enough to make a profit? Have you been able to turn a profit on that property when rates were at 5%? If not, would you be able to raise rents and/or find new tenants who would be able to pay more? And is the house in need of imminent repairs or any work to upgrade it?

Unless you can make a profit on the rental in the next couple of years, there’s little reason for you to hold on to that property, unless you believe that it’s in an area that will experience a significant appreciation in value (20% or more, given all 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 will be able to find tenants who would pay enough to cover your costs in the near future, so you can at least break even? If so, it’s a good idea to try to hold on to it, especially if it’s part of your retirement plan. 

So 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 to a level where you can have a healthier cash flow, it may be worth keeping the home.

If you’re able to sell at some point in the future, you could roll that money into another like-kind property, so you qualify for a 1031 exemption on the home, in addition to a lower rate. 

Selling isn’t an easy or a simple decision. Because this is not your primary home, you’ll need to factor in the capital-gains taxes you would have to pay on this rental. And don’t forget real-estate commissions, so factor in that 6% in fees.

The bottom line: You need to think like a real-estate investor, and leave emotion out of this. If it’s not making money and/or it’s not going to at least break even at any point down the line, you have your answer. But keep in mind that the real-estate market can surprise on the upside and, once you sell the home, you will not be able to undo that decision.

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