Sell our rental home or no? What would you do?

[Shooby]

I would sell it. Get out and be done. Sell it for what you can get and move on and absolve yourself of the headache.

[TheHaitian]

- you can't short sale or foreclose because of your husband security clearance.

- you can't sale because it will wipe out your savings.

- so increase the rent and give the property time to appreciate, also re-finance to a lower rate like Bonney suggested.

[Deleted]

Hard to refinance when it's 50k under water...

[gooddecisions]

Jan 19, 2015 7:59:02 GMT -5 oped said:

Hard to refinance when it's 50k under water...

That was the whole reason the home affordable refinance act (HARP) was created in 2009 and is still available through 2015- to give people who are current on their mortgage payments a way to refinance to today's low rates. It works like any other refinance, just without the appraisal. Since I think she said this is a VA loan, it won't qualify. But, she needs to look into VA Streamline Refinance. Same concept, but for VA loans.

[Bonny]

Jan 19, 2015 8:13:03 GMT -5 gooddecisions said:

Jan 19, 2015 7:59:02 GMT -5 oped said:

Hard to refinance when it's 50k under water...

That was the whole reason the home affordable refinance act (HARP) was created in 2009 and is still available through 2015- to give people who are current on their mortgage payments a way to refinance to today's low rates. It works like any other refinance, just without the appraisal. Since I think she said this is a VA loan, it won't qualify. But, she needs to look into VA Streamline Refinance. Same concept, but for VA loans.

Exactly. There are some special programs for existing VA loans. The Home 6 needs to check out whether they will qualify. Every little bit helps!

ETA: Programs may be limited to owner occupied loans. There may be exceptions if the service member is on assignment. OP when will you be moving back to the area?

[The Home 6]

We don't know. We are going to Kentucky in less than 2 months, and fingers are crossed that it will actually last for 3 years. (This will be our 6th duty station in less than 11 years of wedded bliss.) I would like to do an overseas assignment after this one, but it's "needs of the Army" when it comes right down to where they send him.

[swamp]

Would a deed in lieu of foreclosure hurt his security clearance?

I have no interest in owning rental property not near me, especially some I'm losing money on.

[The Home 6]

Jan 19, 2015 10:54:45 GMT -5 swamp said:

Would a deed in lieu of foreclosure hurt his security clearance?

I have no interest in owning rental property not near me, especially some I'm losing money on.

I don't know, swamp. I'd have to ask.

[swamp]

Jan 19, 2015 11:35:44 GMT -5 The Home 6 said:

Jan 19, 2015 10:54:45 GMT -5 swamp said:

Would a deed in lieu of foreclosure hurt his security clearance?

I have no interest in owning rental property not near me, especially some I'm losing money on.

I don't know, swamp. I'd have to ask.

ask.

[Bonny]

Jan 19, 2015 11:36:05 GMT -5 swamp said:

Jan 19, 2015 11:35:44 GMT -5 The Home 6 said:

I don't know, swamp. I'd have to ask.

ask.

But it will show up on his credit report and he will likely lose his VA eligibility since they actually can afford to pay the mortgage.

If this was a purchase money 1st with a conventional lender in a non-recourse state I'd have different advice.

$50k is a lot of money but not impossible in their situation.

[dondub]

First things first: our renters have made NO indication that they want to move. They are the most lovely renters, we have never had a problem with them, and after reading horror stories from other landlords, I wish I could send them to some of you! If they do move. Which they have never said they want to do.

 I read that you have not raised the rent in 6 years. At just 3%/yr., current rent would be $1074 which is close to the market price you indicated. By not doing this you

have dug yourself a hole that is hard to get out of unless they move and you can market at current pricing. They are great tenants because they are happily $200 under

and don't want to rock the boat. You need to raise the rent immediately at least $75/mo. Check your local market and see what else they could move into for $975-$1000.

From a financial standpoint at the moment- our rental home is a money pit. We charge our renters $900 per month and are paying $1450 on the mortgage. (~$125 of that is extra principal.) So that's a loss of $6600 per year. We are also paying for bug treatments every 3 months, and termite inspection every year, also home warranty.

 Not being privy to your tax returns I'm not sure how bad it is after taxes. You have the Depreciation tax shelter plus write off from your expenses exceeding gross income.

1. Does the payment include taxes and insurance?

2. Do the tenants pay the utilities?

3. Why do you consider the extra $1500/yr. on principal as part of your loss of $6600? This is actually an equity builder by paying down your loan, (even with the current negative position)

    but I would stop that and put it into a reserve account. You did mention the roof right?

4. Do you have a RE savvy tax accountant? With the depreciation benefit and the operating loss, you are lowering your tax liability on other incomes, as the Schedule E numbers

    directly affect your adjusted gross income. It's not as bad as you think, but a pro could help you analyze your position.

5. Do you have bugs that come around every 90 days? Are termites active in your area? Is the Home Warranty worth the expense?

The house is worth $146,000 according to Chase, $134,000 on Zillow, and $150,000 at Smartzip. We owe $186,000 on the mortgage.

If our renters ever decide to move (it is a 3 bedroom, 1 1/2 bath house and they just had kid #3), my husband wants us to sell. I don't know what I want to do. I'd like to hear your advice. 

 If you sell, you actualize your capital loss and will also get a write off on that over an extended period. You will also be nearly tapped out on liquids and the cost to sell will be $11-14k plus any

work orders you may need to pay for on top of the cash you need to pay-off the underwater mortgage. My advice would be to hold this long term and continue to lick your wounds while you

wait for a better time. If the tenants absorb the rent increase, do it again in 15 months. If they move, re-lease at market price. It might be then that after taxes you are losing little and can

afford to roll it into the future.

Good luck!

[The Home 6]

It sounds horrible to say, but I would rather take the hit to our credit (which is in excellent condition) than lose our entire savings. As to losing his VA eligibility, when it comes time to buy our retirement home in 10 years, we can always use my VA loan. I am not tied to this one.

I am hearing good things about the VA streamline modification, but want to speak to someone NOT from the Google machine.

[dondub]

BTW, on a $150k rental house, your federal tax break for depreciation is about $1200/yr, that adds about $100/m to your rent check.

 I am going to disagree with this number. At $1200/yr. and a 27.5 year depreciation period, that puts the basis at a measly $33,000.

They paid over $186,000 (not sure of the grand total).

 My RE investor tax accountant uses the $$$ amount of the tax assessment at time of putting the property into rental status. She is very

 conservative. Tax assessments here break it down into land and improvements. The house is the improvement on the land. The land is not depreciable.

 If the improvement was assessed at $120k at the time you rented it, the depreciation tax shelter would be $4363/yr. I would suggest you take your tax

returns to a very savvy accountant. Let them properly calculate your depreciation if it isn't right now. Then amend all the returns allowed by the IRS to get a

nice check back from Uncle.

 By the time you are done raising the rent, stopping the extra principal, cancelling the home warranty, adjusting your depreciation you may not be all that

 much in the red after taxes are paid. You may also want to reconsider your insurance. Did you change your policy to where it no longer covers possessions you no

longer have inside the house? Have you considered raising your deductible way up? Trust me....you do not want to actualize a small claim so consider what is

known as self insurance. That means paying for minor stuff and saving the major claims for big hits.

[bobosensei]

Jan 19, 2015 14:26:46 GMT -5 The Home 6 said:

It sounds horrible to say, but I would rather take the hit to our credit (which is in excellent condition) than lose our entire savings. 

Not horrible, but it could be incredibly risky.  With the current state of the Army now is not the time to do something that might jeopardize his security clearance.

[Bonny]

Jan 19, 2015 15:21:14 GMT -5 bobosensei said:

Jan 19, 2015 14:26:46 GMT -5 The Home 6 said:

It sounds horrible to say, but I would rather take the hit to our credit (which is in excellent condition) than lose our entire savings. 

Not horrible, but it could be incredibly risky.  With the current state of the Army now is not the time to do something that might jeopardize his security clearance.

I think she's talking about the effect of a Deed in Lieu vs a foreclosure. The military may treat them differently. I think the main issue is going to be that if they can afford to keep the house (and I think they can) the lender may not allow it.

This may be one of the few times it actually makes sense for them to keep pre-paying the mortgage if they can't refinance and lower the payment. From a budget point of view it may mean that between pre-paying the mortgage, steadily raising the rent and slow appreciation they can get out of the situation in 5 years vs 10.

[dondub]

They would be better to put the same funds in a side account that yields compound interest and creates reserves versus burying it into the lender's coffers. Liquidity is more important.

I will continue to suggest you don't sell because as soon as you do you actualize your loss. Holding longer will yield a better result.

Instead, follow some of my suggestions, especially as pertains a good tax accountant and the depreciation situation.

[Bonny]

Jan 19, 2015 19:27:02 GMT -5 dondub said:

They would be better to put the same funds in a side account that yields compound interest and creates reserves versus burying it into the lender's coffers. Liquidity is more important.

I will continue to suggest you don't sell because as soon as you do you actualize your loss. Holding longer will yield a better result.

Instead, follow some of my suggestions, especially as pertains a good tax accountant and the depreciation situation.

Not at .1% savings paying a 5% mortgage. As I said it's one of the few times I think prepaying the mortgage makes sense.

You made some really good points in your previous post.

[dondub]

Bonny,

What is the rate of return on the extra principal they are paying to the bank that also has the downside of decreasing their liquidity?

And thankyou...I have been a RE investor since 3/76 and was a mortgage loan originator from 7/85-6/13 so have some knowledge in those areas.

[Bonny]

In my example of pre-paying a 5% loan with liquid money at.1% ? Pretty sure that's a guaranteed 4.9%.

The problem is under the circumstances they can't get out of the debt unless the property appreciates significantly. I think it's going to be about 10 years. And they'll go through another market cycle in the meantime. Over time they can keep raising the rent and take advantage of refis to lower the payment. I think they will be able to dig themselves out eventually but it's going to take a while. It's probably the only time I've ever been here on the board where I would suggest someone pre-pay 5% debt.

They have $50k in liquid savings; I think they are liquid enough.

As to my credentials; got my first real estate license in 1981 at age 18. I've been involved in real estate one way or another for 34 years. Nothing gives you perspective like coming of age when interest rates are 19%.

[AgeOfEnlightenmentSCP]

Jan 18, 2015 14:58:30 GMT -5 The Home 6 said:

First things first: our renters have made NO indication that they want to move. They are the most lovely renters, we have never had a problem with them, and after reading horror stories from other landlords, I wish I could send them to some of you! If they do move. Which they have never said they want to do.

From a financial standpoint at the moment- our rental home is a money pit. We charge our renters $900 per month and are paying $1450 on the mortgage. (~$125 of that is extra principal.) So that's a loss of $6600 per year. We are also paying for bug treatments every 3 months, and termite inspection every year, also home warranty.

The house is worth $146,000 according to Chase, $134,000 on Zillow, and $150,000 at Smartzip. We owe $186,000 on the mortgage. 

If our renters ever decide to move (it is a 3 bedroom, 1 1/2 bath house and they just had kid #3), my husband wants us to sell. I don't know what I want to do. I'd like to hear your advice. 

It depends on a number of things-- first of all, $6,600 is your gross loss. Your net after taxes is closer to $4,300- and it may be less than that if the annual loss helps reduce your family's AGI enough lower your family's tax bracket.

I don't know how much longer you have to go on your mortgage- but let's say it's 25 years-- taking the worst case from above- Zillow- in 25 years can you see the value of the property rising $160,000? Before you answer (it sounds like a lot), realize that is about 3.2% per year which is the historical average appreciation nation-wide. It could be more or less depending on where it is located.

That, btw, is if the rent is static- and I think you'll agree that you could probably raise rent $50 a month ($600 per year) right now, and could easily expect to raise the rent steadily by $15 to $20 per year-- which you should already be in the habit of doing; and it also assumes the worst valuation as the starting point.

There it is- wait, or bring $52,000.00 to the closing table right now. If the issue is cash flow- I fail to see how parting with $52,000 helps that situation. I'd sit on it.

[AgeOfEnlightenmentSCP]

Jan 19, 2015 11:36:05 GMT -5 swamp said:

Jan 19, 2015 11:35:44 GMT -5 The Home 6 said:

I don't know, swamp. I'd have to ask.

ask.

A deed in lieu is not a forgone conclusion.  The lender, which is not famous for not being stupid, would have to agree to it.  They're not in the mood right now.  Now, on the bright side- depending on whether or not you're in a judicial state- you may be able to collect rent for one to three years without the hassle of making those pesky mortgage and tax payments (I'd keep up the association dues to be a 'good neighbor').

[phil5185]

If the improvement was assessed at $120k at the time you rented it, the depreciation tax shelter would be $4363/yr. I would suggest you take your tax
returns to a very savvy accountant.

Yes, the depreciation shelter would be around $4363/yr.  But the tax-break on the $4363 write-off would be roughly $1200/yr. (depending on their combined state & fed brackets).

[The Home 6]

VA streamline is a no go, at least until I get the mortgage down to 168,000. Dang.

[gooddecisions]

Jan 20, 2015 14:46:53 GMT -5 The Home 6 said:

VA streamline is a no go, at least until I get the mortgage down to 168,000. Dang.

Did you talk to a real person and then another real person at a different company for a second opinion?

[dondub]

The gross loss is not $6600. We don't know what it is, but that $6600 she pays on the mortgage includes regular and extra principal which builds equity by decreasing indebtedness. Principal

payment on a mortgage is not part of the Schedule E equation. I would have thought Paul would know that.

[dondub]

Bonny,

  Unless you own a home until it's free and clear, paying down the principal does not yield any rate of return at all. On a fixed rate

mortgage this will shorten the term, and at that time the extra principal has created a return by decreasing the maximum interest

the loan would have required to be paid in full for the entire length of the loan. Until then, you have simply sent it to your lender and

decreased the debt owed. This does build equity but it's not like you are earning 4.9% on it.

 Better to put it into a side fund. Take the yearly amount and stick it into a 1 yr. CD at 1.15% compounded daily. At the start of year two

do that again and roll the first one over. This rainy day reserve fund can come in handy for any home related issues. You give it to the

lender and it's gone until the property is sold.

[The Home 6]

Jan 20, 2015 14:57:22 GMT -5 gooddecisions said:

Jan 20, 2015 14:46:53 GMT -5 The Home 6 said:

VA streamline is a no go, at least until I get the mortgage down to 168,000. Dang.

Did you talk to a real person and then another real person at a different company for a second opinion?

Yep. 120% is the rule. We wanted to be conservative in our estimate of how much the house is worth.

[TheHaitian]

Jan 20, 2015 16:16:46 GMT -5 The Home 6 said:

Jan 20, 2015 14:57:22 GMT -5 gooddecisions said:

Did you talk to a real person and then another real person at a different company for a second opinion?

Yep. 120% is the rule. We wanted to be conservative in our estimate of how much the house is worth.

So do you have enough cash to get it down to that? Get an appraisal and see...

Might be worth it!

[gooddecisions]

Jan 20, 2015 16:16:46 GMT -5 The Home 6 said:

Jan 20, 2015 14:57:22 GMT -5 gooddecisions said:

Did you talk to a real person and then another real person at a different company for a second opinion?

Yep. 120% is the rule. We wanted to be conservative in our estimate of how much the house is worth.

Well that was a mistake. You don't have to be conservative in "your" estimate of how much the house is worth. You could have told them $168K and let them figure out the rest. If they need a desktop valuation to confirm, they'll get one. If they don't, you're good. I would call another lender.

[dondub]

  Of course any refi needs to make sense and as this is a N/O/O rental there will be a serious pricing hit even if it's doable under any special program. Coupled with the closing costs, I'm

betting the rate you can get IF, just won't pencil out, especially considering your husband's desire to sell.

 Raise the rent and find a good tax accountant conversant in RE investment if you don't already have one, and start squeezing the numbers in a more favorable direction....max depreciation, no

extra principal, no home warranty, higher gross income. If you do this, your after tax position may not be so bad and possibly your loss will be less than the appreciation so holding long term can

begin to make more sense to both of you. There has been a good recovery in home values and in one area here where I own a home with a partner, a very depressed housing market has had the

highest recovery %'s. it may be that two-three years from now you'll be way better off as regards this property.