Keep or sell wife's underwater condo?

[discodarwin]

Ok, want to run this by the geniuses on this blog:

My wife bought a condo in Phoenix area in 2005 (worst timing ever) at $160,000.  We did some very nice remodeling, two new bathrooms, new kitchen counters, etc. and new appliances throughout. (mentioning this because maintenance/repairs SHOULD be very low for a while)
Anyhow, the market tanked BAD here and the condo was probably worth appx. $65,000 at one point.  I think it would possibly sell for about $100,000-110k right now.  We owe about $158k or so on the condo.

I have my cousin renting the place for $800 a month.  Market rent is probably around $950 for that condo.
Problem is, the total cost per month is appx. $1185 (HOA, Mortgage P&I, taxes, insurance).  Cousin has a very steady job and has lived there for about 4 years now.

The way I do my taxes, I estimated the impact of the condo to be a tax savings of about $2500- 3000 a year.

So, the back of the napkin math I have shows:

Cost:  $1185  (plus any repairs)
Income:  $800

Net monthly loss:  $385 
Net Yearly loss:  $4620

Tax savings:  $3000

Total net yearly loss:  $1620


The condo is under my wife's name only, so if we foreclosed or short-sell, it wouldn't impact my credit, I believe.

So, from my estimations, we're only out about $1600 a year for now.  In the future, rents will go up if my cousin moves out, etc... and the home appreciation in the area will continue to help... and in about 25 more years it will be paid off entirely.

Anyhow, so what are your thoughts-- should I keep it, try to do a short sale, or foreclosure?  I'm pretty sure in Arizona that you can do a Foreclosure and they won't hit you with a tax bill for the difference nor can they sue for the difference (non-recourse)... but that may be different since it's a rental.

Please let me know if you are a Sell, strong sell, coin flip, keep, strong keep, or such.  I'm probably a weak keep, since it is super low maintenance right now.


thanks!
D

[abiteveryday]

I'd sell immediately.     You are underwater and it costs you money every month to carry.    If the rent covered the expenses, I could MAYBE see hanging on to it and hoping for appreciation.       If you wouldn't buy it right this minute, with all the same relevant numbers, you should sell it.    It feels like you are losing $50k by selling, but that money is already lost.    Sticking it out in a losing situation won't make that money come back.

[marty998]

I'd sell immediately.     You are underwater and it costs you money every month to carry.    If the rent covered the expenses, I could MAYBE see hanging on to it and hoping for appreciation.       If you wouldn't buy it right this minute, with all the same relevant numbers, you should sell it.    It feels like you are losing $50k by selling, but that money is already lost.    Sticking it out in a losing situation won't make that money come back.

Funny how almost everyone here takes a long term view of stocks (don't panic and don't sell when the market is low!) but when it comes to real estate it's always "you're underwater and losing money! Sell! Sell! Sell!"


How about this... if you expect the market to appreciate, and rents to appreciate, why not buy more?

[Goldielocks]

Look at it three ways:
-------------- current situation / cash flow / hold to build equity vs invest -----------------

If property values remain flat for another 10 years, would you kick yourself for keeping it?  Quite a few times in the past, homes prices have remained flat or declined (against inflation) for 10+ years.
 
-->  If inflation is 2%, and the home prices increase an average of 5% per year (that's 3% MORE than inflation!!); it will take you 15 years to break even with $158k in today's dollars.<--

?You have an effective marginal tax rate of 64%?!  Will that remain for 15 years?
Would you prefer to take that $4620 loss and invest it for future capital gains / defer taxes until your income is lower?

At a "guaranteed" 3% return per year, after 15 years, you will have in hand an extra $93k x cap gains rate (50%) x marginal tax rate (marginal rate may be lower in future).

This scenario is "strong sell"..

-------------Current pricing at $110k vs rent at $850k------------------------------

$104k purchase price (your net cash value today, after commissions) at 4.5% interest rate + $315 Int, HOA, Taxes = $895 (ish) carrying costs, assuming maintenance and vacancy is very low. 

Based on its own financials, without your taxes is best for this analysis.

This review is a strong sell as well --  because I think that cap gains should be gravy on a cash flow positive property...

------------Make it net positive now, and keep it----------------------------------------

Cousin in place for 4 years -- have you ever increased the rent?  I would definitely pin it above $900/month, based on a $110k purchase price shown above,  which is the MINIMUM to keep the place "coin toss", and asking for $950/month to cover your costs is preferred. (modest keep if you have a real estate goal in mind)

[cloudsail]

What about the taxes that you pay on the rental income?  Have you factored that in?  Are you taking depreciation on the property?  If so you might have to pay capital gains tax when you sell.

[discodarwin]

Yes, I am depreciating the property, so plz help me take that into consideration?  I'm not 100% sure on cap gains tax, or if I could roll that over into purchasing a new house or whatever... I'll try to do some research.

[4alpacas]

I'd sell immediately.     You are underwater and it costs you money every month to carry.    If the rent covered the expenses, I could MAYBE see hanging on to it and hoping for appreciation.       If you wouldn't buy it right this minute, with all the same relevant numbers, you should sell it.    It feels like you are losing $50k by selling, but that money is already lost.    Sticking it out in a losing situation won't make that money come back.

Funny how almost everyone here takes a long term view of stocks (don't panic and don't sell when the market is low!) but when it comes to real estate it's always "you're underwater and losing money! Sell! Sell! Sell!"

I consider a single piece of real estate like a stock.  If the company isn't doing so hot, take the loss and buy something with a broader scope (index fund).

[cloudsail]

Yes, I am depreciating the property, so plz help me take that into consideration?  I'm not 100% sure on cap gains tax, or if I could roll that over into purchasing a new house or whatever... I'll try to do some research.

I'm not sure how you'd go about figuring out what your new basis is.  If it is below sell price then you have to pay capital gains tax.  If you want to do like-kind exchange it has to be another investment property, you can't buy a house to live in.  Also you need to find the place that you want to buy within a limited timeframe after you sell your house, you don't get a whole lot of time to shop around.

[DoNorth]

did you refinance?  How have you only paid down $2K in principal if you paid $160K and now owe $158K?

if you could only sell for $100K-$110K, that means you need to come up with ~$50K to get out of this deal (possibly more including transaction costs).  Nobody wants to hold onto a slow bleeder, but this isn't like selling a losing stock.

Think of it this way.  You have a steady renter; yes, you are $100-$150/month out of pocket, but a portion of that $1185 is going to principal pay down so in all likelihood, you're still better off keeping $50K invested elsewhere and letting compounding work for you rather than throwing it at the condo just to get out of it.  I would hold steady and then look at increasing the rent to something you and your cousin are comfortable with.

[frugaliknowit]

Jack the rent and keep it.  Cousin in or out.

[MissStache]

Increase the rent!

[DoubleDown]

You really have only two factors to consider:

1. Ongoing net cost to carry it every year (make sure to consider all costs, including opportunity costs)
2. Speculated appreciation over the years

If #2 > #1 you might consider keeping it (but recognize you are betting on appreciation winning the day over the long haul, and that could end up being a losing bet). Otherwise cut your losses and get rid of it ASAP.

[discodarwin]

did you refinance?  How have you only paid down $2K in principal if you paid $160K and now owe $158K?

if you could only sell for $100K-$110K, that means you need to come up with ~$50K to get out of this deal (possibly more including transaction costs).  Nobody wants to hold onto a slow bleeder, but this isn't like selling a losing stock.

Think of it this way.  You have a steady renter; yes, you are $100-$150/month out of pocket, but a portion of that $1185 is going to principal pay down so in all likelihood, you're still better off keeping $50K invested elsewhere and letting compounding work for you rather than throwing it at the condo just to get out of it.  I would hold steady and then look at increasing the rent to something you and your cousin are comfortable with.

Yes, my wife refinanced to drop the interest rate by about 2 points i believe, and also went from interest only to a 30-year fixed. I think it was part of HARP program. We might be around 155k$.   Trying to decide if raising rent $100 or even $50 is worth potentially speeding up my cousin leaving, as i have had bad renters before and they are an incredible nightmare. Hmmm...

[Mother Fussbudget]

+1 on increasing the rent.  Bump it up $100 this year, and let him know you'll be reviewing the rent annually because your costs are going up, up, up. 

[MissStache]

  Trying to decide if raising rent $100 or even $50 is worth potentially speeding up my cousin leaving, as i have had bad renters before and they are an incredible nightmare. Hmmm...

Can you talk to him about it?  Let him know that you need to increase the rent or you won't be able to pay for it anymore and will have to sell it.  He may be will to pay quite a bit more to stay there, especially if comparable rentals are more expensive AND it means he has to go through the hassle of finding a new place and moving.

It isn't like you are being greedy here- you're trying to break even. 

[discodarwin]

Yes, very good point... I'll show him the actual statements and show how much we are losing a month and I'm sure he'll understand why we have to bump up the rent a bit...  I'm thinking long term that will help us make it a 'keep'... but if anyone else has other ideas or thing I haven't considered, please continue to share!

[marty998]

Yes, very good point... I'll show him the actual statements and show how much we are losing a month and I'm sure he'll understand why we have to bump up the rent a bit...  I'm thinking long term that will help us make it a 'keep'... but if anyone else has other ideas or thing I haven't considered, please continue to share!

Whether you're making a profit or loss doesn't really matter to your tenant. I would simply just point to the market and say this is what the rent needs to be (market rent) in order to comply with tax laws.

In Australia we can get penalised and tax deductions can be denied if we are engaging in sweetheart deals and not charging market rent.

[Gray Matter]

Every time my eye flits over this thread, I read it as "Keep or sell my wife's underwear...wait, what?!"  Kind of amuses me.  Over and over again.

[discodarwin]

Every time my eye flits over this thread, I read it as "Keep or sell my wife's underwear...wait, what?!"  Kind of amuses me.  Over and over again.

Haha-- after seeing the new season of Orange is the New Black, don't think I haven't thought of it...  now that would be a STRONG SELL

[Mother Fussbudget]

See the topic in Real Estate and Landlording  on How to Raise the Rent.

(and PLEASE don't sell your wife's underwear - unless she's in prison... then... ok...  [Thanks Jenji])