I filed bankruptcy (Chapter 7) in 2009 due to poor financial habits, pushed over the edge by real estate losses and business failure. I did not reaffirm the loan on our home, but opted to stay and pay. During this time I took a job and relocated out of state.
Upon moving, I converted the home to a rental property. It currently produces about $500 a month after all expenses (tax, mortgage, maintenance, insurance, etc.) and is worth roughly what is owed. (Reference previously mentioned bad financial habits.) It provides a tax deduction since it’s a loss after depreciation expenses. Sounds great, but…the loan on this property is a HELOC, interest only payments. Adjusts monthly and has a margin over LIBOR of .5%, so the interest rate on this has been effectively 1% for the past 5 years. This will convert in 3 years to a fixed rate, amortized over 20 years, balance is about $380K. This will make it potentially too expensive to keep, depending on loan rates when it converts. I can probably raise the rent, but since it's out of state I like having stable tenants that always pay early and take care of the property. The current tenants are going on their 4th year.
My hope is that the market improves over the next two plus years and I will be able to sell or refinance the property. If that is not possible the property will most likely become unaffordable to me. There is also some deferred maintenance that needs to be addressed (siding, roofing) but I don’t want to spend more money on this place if I can’t ultimately keep it. Since I did not reaffirm, this loan was discharged in the bankruptcy so I have no financial obligation should it go into foreclosure. If I do refinance then I would become financially responsible for the new loan and I don’t want to do that if it’s underwater or loses money.
Since the bankruptcy I have purchased a new home and have no plans to relocate at any time. So my housing situation is handled and a foreclosure at this point will not cause significant problems. Here are the options I think I have.
1) Bank the excess income. If the market improves, take care of deferred maintenance and refinance. Maintain as a rental and work to pay down loan asap.
2) Bank the excess income. If the market improves, take care of deferred maintenance and sell.
3) Bank the excess income. If the market does not improve, let the property go sometime in 2017 when it becomes unaffordable and apply the banked income against any consumer debt or my current residence loan.
4) Take the excess income from this property now and address deferred maintenance and pay down the mortgage. Looks like a big risk to me if the market does not improve and option 2 becomes reality.
Any suggestions, comments, insights?
Footnote: If you feel to need to castigate me for my previous sins feel free, lord knows I feel bad enough about them anyway. I think we have learned our lesson and our financial house is close to getting in order now. Working to improve all the time but really only have a mortgage to pay off and we're saving about 20% of our income now. This is the one unresolved issue remaining from our past.
