Author Topic: Can I get your thoughts?  (Read 6090 times)

reverend

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Can I get your thoughts?
« on: May 11, 2012, 11:35:21 PM »
So I bought a house in Denver in 2006 (15 min from the airport, walking distance to good charter school, nice, clean, tidy neighbors, easy access to freeway and metro areas, excellent for commuting, lots of shopping within *easy* biking distance etc) a few years ago.
I have a 5% fixed mortgage costing me about $1500/month.
I bought it for $206K and it's now ~$170K if I were to sell it, but I still owe about $192. The house has plenty of decent upgrades.

My office closed, so I moved out of state, and found a pretty good management company (Northpoint Asset Management) to keep my house rented out since I'm far away.

So now I'm 1000 miles away and currently unemployed. I have plenty of savings that I really don't want to touch, but jobs seem hard to come by here (the GF lives here, so housing is cheap and she's employed so I'm not starving).

My thinking is that I might want to consider selling the house if the market comes up to get me at least what I owe on it. The house was built in 2005 so I don't anticipate big issues (water heater, roof etc) but I hate being so far away and having to pay out the ass for small issues (230 dollars to replace a thermostat! I could have done it myself in 5 minutes for $50!).

My thinking is that with it rented out, I only chip in about $120/month to keep the house.  It's basically paying for itself.  If I sell it before it starts having issues (and I break even) within the next few years, then I can buy another house where I can rent out a basement or granny quarters in the back or however that works out.

Right now I have about $20K in my checking account (for current living expenses), 22K in a 401k from my old job and about another 50K in the stock market, which I don't want to touch because it'll be my retirement (I'm thinking a million in stocks giving me 5% return will be good living when I retire).

I hate having the liability of the house and not being able to keep an eye on it, and the easy answer while I'm underwater on it is to just keep it rented.

I guess my question really is what you would do in this situation?  I'm in Texas now, but don't particularly care for where I am. I'll definitely give it a few years for the sake of the GF and giving it a real try, but I am wanting to go back to California (hah, dumb move financially) but most likely check out Portland, OR for a future "I'll settle here for the foreseeable future" house.

So I keep the house rented out for now, don't buy in Texas, then sell my Denver house when I can and put a good down payment on something in Portland (or wherever) and try to make a rental pay for most of it?
Or keep the Denver rental "forever" and just move on with saving up for a down payment on something in Portland when I get there and save like mad while I'm here in Texas?


Of course, I have to find some sort of damn job here too that doesn't eat my soul. It looks like a huge pay cut coming down here, even if I get a job.  (I do desktop support, got $58K/year in Denver, here it looks like $40K/year is a good salary for the same position, with the cost of living being aboutthe same, that will hurt!)

Edit: So if I wanted to refi the house, I would have to chip in at least the $20K (192K mortgage to the actual value of $170ish) to be able to get a new loan. I don't see how giving the bank more money makes any sense. As it's a rental, I probably wouldn't be able to get under 5% interest anyway... I just thought of this but don't know if that makes sense in what people think.

Edit 2: I just realized that writing off the mortgage interest makes the house rental save me money as I get some of the money back every year.  I am a n00b with renting out my house, so I don't know how all the depreciation and such works when it's a business expense and the house a depreciating asset, but I'll learn that by next tax season I guess.
Anyone know of any good "this is how taxes work on renting out a house" tutorials?
« Last Edit: May 12, 2012, 12:14:25 AM by reverend »

gooki

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Re: Can I get your thoughts?
« Reply #1 on: May 12, 2012, 04:20:45 AM »
Quote
So I keep the house rented out for now, don't buy in Texas, then sell my Denver house when I can and put a good down payment on something in Portland (or wherever)

Sounds like a good plan.

arebelspy

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Re: Can I get your thoughts?
« Reply #2 on: May 12, 2012, 08:02:04 AM »
Well, let's do some analysis to find out if you should sell or hold.

My thinking is that with it rented out, I only chip in about $120/month to keep the house.  It's basically paying for itself.

My only concern is you may be underestimating what it costs you.  Is that 120/mo when it's rented and has no repairs (i.e. it rents for 120 less than the mortgage payment)?

1) How much is your P&I payment (principal and interest -- mortgage payment minus the insurance and taxes)?
2) How much is it rented out for?

Any depreciation will lower the purchase price, essentially, when calculating what you owe on a sale.  That is, it will widen the gap between your current underwater amount and current market value, because of depreciation recapture.  Doesn't mean you shouldn't do it, but it's something to keep in mind, and it will be need to pay back when you sell (unless you 1031).
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reverend

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Re: Can I get your thoughts?
« Reply #3 on: May 12, 2012, 10:22:52 AM »
Yes, that's $120 when it's rented and no repairs needed.  My P&I is $1,104, and about $470 more for the taxes, insurance and mortgage insurance (the latter is $89/month, ugh).

I collect $1,377, and that's after the management agency takes their cut. The actual rented out price is $1375/month, at 91 cents/sqf.

If the house is empty for a while (current rented is leased until December of this year) I will lose my shirt quick - but I wonder if I can't pay it if Wells Fargo will loan-modify my ass. :) If something big breaks, I'm coughing up the dough again. Basically, I have no real margins on it.  I pay the storm drain fee ($55/year) and a $40/month HOA fee too.


Well, let's do some analysis to find out if you should sell or hold.

My thinking is that with it rented out, I only chip in about $120/month to keep the house.  It's basically paying for itself.

My only concern is you may be underestimating what it costs you.  Is that 120/mo when it's rented and has no repairs (i.e. it rents for 120 less than the mortgage payment)?

1) How much is your P&I payment (principal and interest -- mortgage payment minus the insurance and taxes)?
2) How much is it rented out for?

Any depreciation will lower the purchase price, essentially, when calculating what you owe on a sale.  That is, it will widen the gap between your current underwater amount and current market value, because of depreciation recapture.  Doesn't mean you shouldn't do it, but it's something to keep in mind, and it will be need to pay back when you sell (unless you 1031).

reverend

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Re: Can I get your thoughts?
« Reply #4 on: May 12, 2012, 12:29:29 PM »
I realize that I am relatively unorganized in my thoughts. When I left my job and prior to renting out the house, I spent one paycheck a month on the house (1479/month, plus gas, electric, HOA fee, water etc). That's about $1800/month.

Now I have the difference between cost and rental income plus the HOA fee. Far less, but still quite the burden if I am not employed if/when the renter moves out and a new one moves in. Granted, my location is good enough that this renter signed a lease 3 days after I listed it. I can't always expect that sort of luck though.

That sort of housing cost would almost be ok if I owned a multi-family dwelling and rented out the other unit(s), but for one house. Hmm.

arebelspy

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Re: Can I get your thoughts?
« Reply #5 on: May 12, 2012, 05:19:25 PM »
I collect $1,377, and that's after the management agency takes their cut. The actual rented out price is $1375/month, at 91 cents/sqf.

I'm still not clear on the gross rent.  I'm sure the management company doesn't pay you $2 to take care of it.  ;)
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reverend

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Re: Can I get your thoughts?
« Reply #6 on: May 12, 2012, 10:08:08 PM »
Sorry, the house is rented out for $1475/month. That is what the renter pays to live there.

I guess I was a little fast on the trigger earlier. Oops. :D 


I collect $1,377, and that's after the management agency takes their cut. The actual rented out price is $1375/month, at 91 cents/sqf.

I'm still not clear on the gross rent.  I'm sure the management company doesn't pay you $2 to take care of it.  ;)

arebelspy

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Re: Can I get your thoughts?
« Reply #7 on: May 12, 2012, 10:20:58 PM »
Okay, so it's cash flow negative by 120/mo. when it's rented. 

That doesn't then take into account maintenance/capital expendatures/vacancies (during which it is cash flow negative about 1800/mo).

So let's try to figure that out.

50% rule means about half of your gross rents will go to cover all those costs.

So you'll get 1/2 of 1475, which is 737.5.  That covers the maintenance, vacancy, insurance, taxes, management, etc.  Then we subtract your P&I of 1104, 89 for PMI, and 40 for HOA. 

That leaves us at -495.5.  Meaning that over the long term, it will actually average to be cash flow negative about $500/month.

You're 22k underwater.  If you assume that we've hit a bottom and that it won't stay there for awhile but that house prices will immediately start to rise with inflation (let's say 3%), it will take you 4.12 years to get back up from 170k to 192k.  In that time, you will have paid $24,000 (at -500/mo for 4 years).  So you'd pay $24,000 to get back that 22k.

That's a return of -2.09% per year on your money.

You may want to consider selling now and taking the loss.  Then take that $500/mo that you're losing on the house (120 when it's rented, 1800 when it's not, plus random repairs, averaging out to that 500) which you no longer will be losing and invest it.  I'd hope you can get better than a return of -2% on your money over the next 4 years.

Plus that has the added advantage of not being cash flow negative and getting in a tight spot when you are jobless, etc.

If you take the loss now, sell the house, and something happens (in say two years), you just don't save that month.  Versus if you keep the rental and something happens in two years and you lose the house to foreclosure or whatever.. you'll have thrown away another 11k in the meantime on the house with nothing to show for it.

Something to consider.

So I guess final conclusion, since this thread is asking for our thoughts, I guess I'd personally lean towards selling.  Keeping it isn't a terrible choice though.  I just wanted to get the numbers a little more accurate (perhaps) to maybe aid you in your decision.

Good luck!
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reverend

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Re: Can I get your thoughts?
« Reply #8 on: May 12, 2012, 10:45:44 PM »
Thanks, your answer is exactly what I was looking for but I don't have the financial brain to see things that way.

There is one thought of the GF and I possibly moving up to Denver in a year or so. That means that we'd live in the house at least.
Selling it - what are the implications of selling it at a loss? I do want another house but if I take a hit of $22K, either I pay that to the bank or my credit suffers. Can I write the loss off against my income the next few years?

ANother idea - can I raffle out the house in a lottery? $100 tickets over 2000 tickets means I get $200K and someone gets a house for $100. I wonder what the legalities of that are..?!

A cash infusion to refi the house at current lower rates (a value of $170K and I throw in $22k or more to get the LTV ratio to 80%?) would work, but that's money I would rather invest or use as a cash buffer than to hand it to the bank.

What of the ethically murky idea of stopping payment and having the bank rework my mortgage? Although hypothetical, it may be reality if I don't have a job and the house isn't rented. If I can't pay it, I wonder if Wells Fargo will work with me on the FHA loan...

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Re: Can I get your thoughts?
« Reply #9 on: May 12, 2012, 11:23:42 PM »
Rev,

You owe 192K but the house is worth 170K; to get to a LTV of 80%, you need to pump nearly 60K into the house. 

Either come up with 30K to get out of the mortgage with your credit intact, or continue to invest your time and money into a house you neither use nor want, or continue to collect the rent but stop paying your mortgage and taxes.  These are not easy options, but getting rid of this house is probably your best bet in the long run.  Tough call.

 

Dicey

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Re: Can I get your thoughts?
« Reply #10 on: May 13, 2012, 12:00:43 AM »
Good post, arebelspy. But where are the calculations for depreciation and mortgage interest and other allowable write-offs? I'd suggest that an hour at a CPA would be money well spent. "reverend" might not be as under water as he appears.

I have a rental house that's not quite positive cash flow, but come tax time, the scale tips in my favor. I'm keeping it because 1) it's not quite upside down, 2) I love the house 3) I CAN make the payments and upkeep, 4) I plan to retire there one day and 5) I gave my word that I would pay this loan back.

I realize that reverend's a little upside down, but there are more angles to be considered. Does anyone seem to care that when they promised to pay, they promised to pay? Does anyone place any significant value on giving their word and keeping it?

Re: Smedley's comment - you're right, but banks are unlikely to go 80% LTV on a non-owner occupied home, they generally want 75 or even 70% LTV. What about the HAMP program? I recently heard a friend mention that she'd used it to modify a loan on an income property, but I don't know the details. Might be worth looking into.

Finally, is it too much to hope that with an election looming, the guv'mnt might get it together and offer some kind of reasonable loan relief program? I'd recommend that rev sit down with a CPA, figure out if he's taking all the write-offs he's entitled to and then hold tight to see what the rest of the year brings.
Then he won't have to deal with the effects of ruining his credit just yet.

arebelspy

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Re: Can I get your thoughts?
« Reply #11 on: May 13, 2012, 08:14:35 AM »
Good post, arebelspy. But where are the calculations for depreciation and mortgage interest and other allowable write-offs? I'd suggest that an hour at a CPA would be money well spent. "reverend" might not be as under water as he appears.

I covered depreciation in an earlier post:
Any depreciation will lower the [original] purchase price, essentially, when calculating what you owe on a sale.  That is, it will widen the gap between your current underwater amount and current market value, because of depreciation recapture.  Doesn't mean you shouldn't do it, but it's something to keep in mind, and it will be need to pay back when you sell (unless you 1031).

Mortgage interest writeoff may help a small amount if he's not taking the standard deduction.

But depreciation that he takes now will temporarily help him, but if he sells in a few years, once it's appreciated back to what he owes, he'll have to pay that depreciation he took back.  Essentially the depreciation will be a wash (which on a 4 year timeframe isn't a big deal), thus I didn't include it.

I certainly wouldn't argue that it's a good idea to meet with a CPA.  But I don't think either of those things will help him much.

I realize that reverend's a little upside down, but there are more angles to be considered. Does anyone seem to care that when they promised to pay, they promised to pay? Does anyone place any significant value on giving their word and keeping it?

Please tell me where I said he shouldn't pay or keep his word?  Never once did I say to walk away and not pay.  I specifically said it may be better to take the loss (i.e. sell the house and pay 22k out of pocket that you're underwater).  The OP wasn't asking about how to not pay.  Sometimes that's the case, and has been more in the past few years, but in this circumstance I don't know where this comment came from, but it seems really misplaced in this thread.

Then he won't have to deal with the effects of ruining his credit just yet.

Why would his credit be ruined?  The OP mentioned once possibly the idea of stopping payment to get it reworked, but no one mentioned walking away, foreclosure, heck, no one even mentioned a short sale.  We've specifically been talking about the opposite, where he comes up with cash at closing because he's underwater (and pays his debts, and doesn't hurt his credit).  I feel like between the depreciation comment and this, maybe you didn't read the whole thread?  Or maybe I'm just confused, and you can help clarify.

ANother idea - can I raffle out the house in a lottery? $100 tickets over 2000 tickets means I get $200K and someone gets a house for $100. I wonder what the legalities of that are..?!

Illegal.

A cash infusion to refi the house at current lower rates (a value of $170K and I throw in $22k or more to get the LTV ratio to 80%?) would work, but that's money I would rather invest or use as a cash buffer than to hand it to the bank.

What smedley said.

What of the ethically murky idea of stopping payment and having the bank rework my mortgage? Although hypothetical, it may be reality if I don't have a job and the house isn't rented. If I can't pay it, I wonder if Wells Fargo will work with me on the FHA loan...

Talk to them first.  See about getting it reworked while current.  This is more common than you think.  I mean, getting it actually reworked is very rare.  But getting it reworked while current is about the same chance as doing it while late on payments.
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reverend

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Re: Can I get your thoughts?
« Reply #12 on: May 13, 2012, 09:59:24 AM »
Whoa, things happen here when I sleep. :)

Thanks for the comments.  Bummer that the lottery part is illegal, it sounded like a great idea in last night's sleep-deprived mind.

No, I am not saying that I am going to do anything illegal or walk away from the obligation of paying the loan. Of course, if it's between me starving and the bank getting their money, I won't starve.

Rebel - your analysis is as always a joy to read. Well, ok, maybe not given the situation, but it makes things a lot clearer to have the expenses laid out like that.  I have held out hopes that the property value would come back up to just North of what I owe to cover the fees of selling it. That might not happen for a while.
Then next door neighbor is selling his house for $150K (divorce) but it's smaller and doesn't have all the upgrades. I have a sneaking suspicion that people may just look at "3 bd/2.5b" and pick the cheaper one, meaning that as far as comps go, my house will look expensive even at $170.

Then again, my current renter is leased until December so I could price it high(er) at $181000 and see what happens.

It might even be worth it to mention it's rented as a selling point for an eventual investor!


Dicey

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Re: Can I get your thoughts?
« Reply #13 on: May 13, 2012, 11:34:34 AM »
To "arebelspy": only the first paragraph was a response to your specific comment. I thought yours was a good answer, as far as it went. My reply was in response to the original post and the subsequent comments. I feel it's generally a waste of other's time to reply without reading the comments first. I try to only share ideas that haven't been offered.

The reverend's position is not so precarious that the answer is easy. All the other items I mentioned, while perhaps small, could collectively make a difference. It's not going to take much of an improvement in his real estate market for this problem to correct itself. In the meantime, his negative is not that large and could be reduced. When the market improves, as it historically always does, it would be a shame if reverend had given up his home for no gain and little relief.

I found MMM soon after its birth, but am a newcomer to the forums. I love the variety of questions and the quality of responses. I am uncomfortable with the whole quote thing for two reasons: the smaller font is harder to read, and when I attempt to use it, I can't see what's actually going to show up in the post. Is this because I use a mac? I don't know, but when I hit "preview" it would be nice to see what's actually going to look like. Several people have kindly offered tips, but I've had limited success, despite my efforts to figure it out. So, until I do, I tend to avoid using quotes, particularly multiples. Lesser of two evils, IMHO. Apologies if my original reply was not crystal clear. I hope that my input was still of value to reverend and his specific situation.


arebelspy

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Re: Can I get your thoughts?
« Reply #14 on: May 13, 2012, 12:02:47 PM »
Ah, gotcha.  I was confused because I wasn't sure which was replying to me and which other parts of the thread.  My bad. :)

Makes sense on the quote thing.. what does it look like when you hit preview?  Have you tried it in Firefox, instead of Safari (or vice-versa)?  Can you post a screenshot of what it looks like when you hit preview?

If you want to quote someone easily, cut and paste the part of what they wrote that you want to quote into your reply box. Then, instead of putting quote marks around it ("), highlight it and click the little speech bubble icon above the reply box (right below that "Font Size" dropdown box).  That will put it in the bubble quotes, and make it easier to read.

I do appreciate your posts.  Even (and especially) contrary posts are helpful, to help consider other options.  You're right that rev's situation isn't clear cut, it's a tough call.  The interest expense is a good point if he itemizes, every little bit helps.
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reverend

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Re: Can I get your thoughts?
« Reply #15 on: May 13, 2012, 01:55:25 PM »
Yes, I itemize. :)
No, my case isn't clear-cut.  If I keep the house rented and have good renters who keep the house nice and clean and don't blow things up, I should be ok for a while.  That was my first house and a great learning experience, but I am really of the idea that learning should be as close to free as possible.

If I can keep away from the 50% rule for a couple of more years, I hope the market does improve and I can sell the house. A profit would be nice, but break-even is definitely acceptable.


Diane C - when you say my deficit isn't large and could be reduced, how do you mean?  I'm thinking that either rents can go up (possible, but I'd rather take a small hit and keep the house rented than a higher rent and wait to rent it out) or my mortgage can go down.
The latter isn't likely for a while. hehe

Also, can you press Command on the keyboard and scroll up on the mouse to increase the font size in safari? That might work. in Windows it's CTRL-scroll up on the mouse to increase the font.


Bank

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Re: Can I get your thoughts?
« Reply #16 on: May 13, 2012, 03:44:53 PM »

So you'll get 1/2 of 1475, which is 737.5.  That covers the maintenance, vacancy, insurance, taxes, management, etc.  Then we subtract your P&I of 1104, 89 for PMI, and 40 for HOA. 

That leaves us at -495.5.  Meaning that over the long term, it will actually average to be cash flow negative about $500/month.

You're 22k underwater.  If you assume that we've hit a bottom and that it won't stay there for awhile but that house prices will immediately start to rise with inflation (let's say 3%), it will take you 4.12 years to get back up from 170k to 192k.  In that time, you will have paid $24,000 (at -500/mo for 4 years).  So you'd pay $24,000 to get back that 22k.


Why don't you subtract off interest only, rather than P&I, when you do this exercise?  Won't he get that principal payments  back when he sells, because the loan balance will be lower? 

Note that I'm not taking issue with the advice, I just want to understand the process you went through here if I ever have to do it myself.  And right now, I think I'm missing something.

arebelspy

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Re: Can I get your thoughts?
« Reply #17 on: May 13, 2012, 04:18:30 PM »
Reverend: You may in fact be able to keep away from the 50% rule.  It only speaks to long term what it'll average out to be.  In the short term you may be able to beat that.  Since the house is newer, hopefully it'll have less repairs and capital expenditures (i.e. no new roof needed, knock on wood).

Bank: Good point.  I'm assuming that the vast majority of his payment right now is going to interest, and very little to principal.   Rev should add in mortgage interest writeoff and the principal amount being paid back into his returns.  Additionally depreciation (and what the subsequent recapture will cost - easy enough to project).  Those are more minor variables.

The biggest unaccounted variable is the appreciation.  If it takes 6 years, instead of 4, to get back to not underwater, it'll cost him 36k to get back 22k.  Definitely a bad idea.

That could easily happen if the market bounces along a bottom for a few years before rising.

On the other hand, if it bounces back and jumps up 5-10%, then rises w/ inflation, it may take 2-3 years instead of 4. 

That is really the key variable, which determines how long he will have to be paying out this 500 per month (more so than a minor amount to principal / interest depreciation).

I, unfortunately, have no insight into that number.

Anyone?   :)
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Re: Can I get your thoughts?
« Reply #18 on: May 28, 2012, 08:53:33 PM »
Hi Reverend,
Sorry to be so slow to reply. I think there are a few things you could to tip the scales in your favor or at least minimize the pain. First, check out the HAMP Program as mentioned in my comment on 5-12-12. It could work for you. Second, my advice is to find yourself a good CPA and buy an hour of his or her time. Now that tax season is over, they will be happy to schedule an appointment. Could cost a C-note or thereabouts, but it's money well spent and tax-deductible, if the purpose of the visit is to discuss all the tax ramifications of owning and writing off rental property. Yes, you could read books, but it is important to keep up with the latest IRS Rules & Regs. That's what you pay a CPA for, especially at the beginning. Third, check your numbers to see that you are not over-withholding. Your new CPA can run the numbers and offer guidance.

There are other, less obvious write-offs: if you travel back to work on your rental property, the trip is tax deductible. Should you work on the house all day and then visit with your pals in the evenings, you can still write it off, as long as you follow certain parameters. There are guidelines regarding replacements vs. upgrades. If you replace the carpet in your primary home, generally you can't write it off. You can only add it to your basis. For a rental property, you can write it all off, sometimes in the same year. Next, you need to figure out depreciation. Believe it or not, there can be tax consequences if you DON'T take it on a rental property. IRS logic or something equally confusing.

If you think that your market's hemorrhaging has slowed to a trickle, these steps could make the difference. If you hang on for a few years and the market begins to rebound, you will look like a genius. Plus you'll have the satisfaction of knowing you didn't just walk away from your commitment.
Please let us know what you discover and decide.