Author Topic: Underwater Rental Home Advice  (Read 3454 times)

Smevans

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Underwater Rental Home Advice
« on: November 16, 2015, 06:48:06 PM »
I need some home advice. I bought a home 5 years ago when I lived in Michigan. My plan was to live there 10+ years. But two years ago, I moved to Chicago for better job opportunities for fear of being let go at my Michigan role (they had recently let go 30 of the 34 people in my group). Thankfully my brother was still in Michigan and rented the house from me.

Flash forward to the present. My brother is moving out of Michigan at the end of this month and I am moving to Portland, OR for a large pay raise and better employment opportunity. The problem I have now is the house. I owe $104,830.00. It is probably worth $100,000 right now. So add in the 8-10% realtor fees, I am $13,000-$15,000 underwater.

My first gut reaction was to rent it out. But thanks to a recent bathroom disaster, the bathroom needs to be remodeled. The tiles around the shower crumbled, revealing a molded soaked drywall behind it. I have stripped the walls to the studs for the time being but have not gone further.

So what options do I have?

1) Take out a loan to remodel the bathroom and do minor maintenance items ($5k-$10k). Then hire a property manager to rent it out. Mortgage, escrow and insurance equals $940. I think it can rent for around $1000. So I would take a minor loss every month.

2) Take out a loan to remodel the bathroom and do minor maintenance items ($5k-$10k). Then list the home with hopes of selling for $110,000+. It should be worth $110k-$115k once the bathroom is remodeled.

3) Put the house up for sale. Take out a loan to cover the negative equity.

4) Hire someone to maintain the home. Continue to pay the mortgage until I am not underwater and can sell or can slowly save for the renovations needed.

Some of the renovations/maintenance I could do myself. Unfortunately I leave for Oregon on Thursday. I am leaning towards option 1. But the idea of going further in debt when I am desperately trying to pay off credit cards from past immature mistakes makes me cringe. But that may be the only option I have right now.

Lay it on me Mustachians...

Zman

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Re: Underwater Rental Home Advice
« Reply #1 on: November 16, 2015, 06:55:47 PM »
My Opinion:

In option 1, you are still building equity in the house right? so if you are taking in $900 (after prop manager fees) and paying $1000, you'll still be building a few hundred in equity each month. As long as you arent hit with many other major repairs, i'd go this way. Besides, you just got a large pay raise. If it ends up being too much hassle cut your losses and sell in a couple years.

What part of michigan? Do you have other family/friends in the area who can help you property manage(could help with taxes)?

thedayisbrave

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Re: Underwater Rental Home Advice
« Reply #2 on: November 16, 2015, 07:06:18 PM »
You don't say how much the place rents for.

It's difficult to offer guidance when you don't lay out the rest of your financial picture.  But since you lay out the fact that you have some debt, I'd choose Option #2. 

Having a rental property that has any sort of negative cash flow is a no-no, even if you are indeed building equity.  In that scenario, you are pretty much just banking on appreciation, which is betting - not investing.  Nobody can predict whether home values will rise or fall.

ShoulderThingThatGoesUp

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Re: Underwater Rental Home Advice
« Reply #3 on: November 16, 2015, 08:32:19 PM »
Short sale?

A_Rock

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Re: Underwater Rental Home Advice
« Reply #4 on: November 16, 2015, 08:49:57 PM »
I think no matter what you need to fix the bathroom. You're not likely to get a decent price with the bathroom being a disaster. I would fix the bathroom, get an opinion from a real estate agent on what they think you could sell for. Then evaluate based on that info. I also own a home that is underwater and am therefore an accidental landlord. My mortgage is $858, the rent is $1000 a month and I do the property management myself which I don't particularly like doing but I'm close by and capable. My plan is to wait it out for my home to be less underwater before selling.

Bearded Man

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Re: Underwater Rental Home Advice
« Reply #5 on: November 16, 2015, 10:20:40 PM »
Stop throwing good money after bad. Cut your losses, and move on before it gets worse.

pbkmaine

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Re: Underwater Rental Home Advice
« Reply #6 on: November 16, 2015, 10:26:14 PM »
Sell the house. Do not buy a new house until you are reasonably certain you will be in a place for 10 years.


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humbleMouse

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Re: Underwater Rental Home Advice
« Reply #7 on: November 16, 2015, 11:36:10 PM »
I think no matter what you need to fix the bathroom. You're not likely to get a decent price with the bathroom being a disaster. I would fix the bathroom, get an opinion from a real estate agent on what they think you could sell for. Then evaluate based on that info.

+1

Another Reader

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Re: Underwater Rental Home Advice
« Reply #8 on: November 17, 2015, 03:38:39 AM »
With the damage you describe, the house cannot be financed.  That leaves a small pool of cash buyers that will demand a steep discount.  Since you have no equity, you would have to bring a lot of money to the table to sell the property.  The better choice is to hire someone to redo the bathroom and fix everything else that needs to be done before you sell or rent.  However, you need someone locally to manage the project, as most contractors and handy people need supervision and management to make sure the job is finished the way you want and in a timely manner.

If you can find a competent property manager, they should have vendors that can get the house rent ready.  Finding a good property manager in two days is going to be difficult, especially from Chicago.  You may be in for a trip to Michigan after your brother moves.

Whatever you do, make sure the heat and water are on for the winter and they are set to a level that the pipes won't freeze.  Otherwise a $5k job could turn into a huge pipe replacement and water damage job when your pipes freeze.

Bearded Man

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Re: Underwater Rental Home Advice
« Reply #9 on: November 17, 2015, 08:06:43 AM »
Good point about the bathroom and financing. Fix it so you can sell it. Use the MLS4owners or Realtor.com if you have to, in order to reduce your transaction costs when selling. Might take longer than selling with a realtor, but check with one.

Bottom line, fixing it to keep it would not be worth it. You'd be losing money every which way, and appreciation is obviously not kissing the area much. Fix it up enough to sell and eat the loss. Better to lose a bit now than keep losing money every month, and then watch the prices tank all of a sudden, as they are expected to in a couple years.

frugaliknowit

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Re: Underwater Rental Home Advice
« Reply #10 on: November 17, 2015, 09:40:07 AM »
Fix it up enough to get rid of it.  Move on.

talltexan

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Re: Underwater Rental Home Advice
« Reply #11 on: November 17, 2015, 10:59:45 AM »
Unless it's against your ethical code, strategic default should be on the table. Particularly if you're not ready to commit to owning out west.


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