Author Topic: What to do with this rental property?  (Read 1363 times)

HayMaker

  • 5 O'Clock Shadow
  • *
  • Posts: 25
  • Location: New Mexico
What to do with this rental property?
« on: January 11, 2014, 10:37:37 AM »
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 itís a loss after depreciation expenses.  Sounds great, butÖthe 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 donít want to spend more money on this place if I canít 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 donít want to do that if itís 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.

HayMaker

  • 5 O'Clock Shadow
  • *
  • Posts: 25
  • Location: New Mexico
Re: What to do with this rental property?
« Reply #1 on: January 12, 2014, 07:25:43 AM »
Option number 1 it is.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 27779
  • Age: -999
  • Location: Traveling the World
Re: What to do with this rental property?
« Reply #2 on: January 12, 2014, 09:11:31 AM »
Option number 1 it is.

All right then.

Good luck!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.