Author Topic: Sell or Payoff HELOC?  (Read 1812 times)


  • 5 O'Clock Shadow
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Sell or Payoff HELOC?
« on: July 14, 2014, 01:34:38 PM »
Hey guys,

First time poster, long time lurker. I wanted to come out and ask a question that's been boggling my mind for sometime now. Keep in mind: I'm not an experienced land lord or property manager, I've only become one out of necessity...

A little back-story: I bought my first condo about a year after I graduated college in 2006. As you all know, this was the very top of the real-estate bubble and prices were at their peak. Developers were going through our city and converting apartment buildings into "luxury condominiums", throwing in $15k worth of upgrades and charging an extra $50k for the privilege to live in them. Being a clueless college grad with a nice $70k salary, I decided to buy the condo @ $255k even though it felt like a bit of a stretch (but I loved the appliances!). We weren't thinking about it as an investment, just a place to live. My wife (then girlfriend) and I happily lived in that condo from 2006 to 2011. In each year of ownership, we watched the value plummet as the bubble popped and units around us started to foreclose. We didn't want to just "mail in the keys" like a lot of our neighbors were doing. On top of all that, we were expecting a child soon, we wanted to move into a house where we would have more space, and a yard for him to play in. We wanted to buy a house.

In 2011, the condo appraised at $160k, making it impossible for us to sell without doing a short-sale or foreclosure. We decided to rent out the property until prices came back and we could unload it without taking a huge loss. We hired a rental management company to manage the property @ $65/month + maintenance costs (both my wife and I work full-time). The bank gave us some funny loans on this property ... we took out an 80/15 loan with one mortgage @ 6% ($204,000) and another HELOC @ 9% ($38,250). We could only afford to put down 5% at the time ($12,750). The HELOC has a 15 year balloon payment that is due in about 7 years ($15k). We were able to refinance the first mortgage but the banks wouldn't work with us on the second because we no longer had equity in the house as prices dropped.

We've been renting this property for 2.5 years now while taking a pretty significant monthly loss. Just recently we were able to increase the monthly rent and we're getting closer to breaking even when you take into account principal and tax deductions. The value of property has finally come around as well to be close to what I currently owe on it. What I'm trying to figure out is if I should put even MORE money into this property to make it cash flow positive, just unload it and take a big hit, or endure the slow bleed until a better time comes around.

Here is the current financial picture:

Current Appraisal: $210,000
Mortgage 1: owe $187,000 @ 4.8% (-$1278 / month)
Mortgage 2: owe $26,500 @ 9% (-$305 / month)
HOA: -$320 / month
Rental Income: $1550 / month
Management Fee: -$65 / month
Maintenance: -$120 / month
Cash Flow: -$438 / month

Here are the options that I see...

Option #1: Try and make it cash flow positive: The only way to do this would be to dump $26k in cash to payoff the second loan and then try to refinance the first loan. This would lower the first payment by about $280 and eliminate the second payment of $305. At this point, the rental would be generating $150 / month in income and well as paying down the principal on the loans. As a bonus, we'd no longer be paying the ludicrous 9% interest rate on that loan either. If we held on to the place for a long time, I think this option would eventually make sense.

Option #2: Sell it: I think I could sell the property for about what I currently owe on it... this would take the liability off our books but we'd be coming out of pocket for closing costs (estimated $8k to $12k). This would cost us about half of what the cash flow positive option would cost us, but we wouldn't have an income generating property either.

Option #3: Hold and Wait: We've hung on for this long. We have enough income that we can carry the negative cash-flow comfortably, it just feels icky every month knowing this money is just vanishing. In a few years we may be able to raise or rent more or even sell for a bit of a profit if the markets continue to recover.

What would you advise in my situation? Maybe something that I haven't thought of yet? Any help would be greatly appreciated!

Cheddar Stacker

  • Magnum Stache
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Re: Sell or Payoff HELOC?
« Reply #1 on: July 14, 2014, 01:56:26 PM »
Welcome to the forum!

Option #1 doesn't make sense. You can't "make something cash flow positive" by throwing cash at it. It's either cash flow positive or it's not (hint: it's not). You would have to drastically reduce expenses or increase revenues (without using your own cash) to turn it into a cash producing asset.

Option #2 is what you should do but your explanation doesn't make sense. You state at the end "but we wouldn't have an income generating property either". The problem is you don't have an income producing property, you have a loss producing property. It's time to sell.

Option #3 should only be considered if you have very strong indications that rents will be going up a lot, expenses will be going down a lot, or the property will appreciate a lot in the near future (which is likely just speculation).

I would sell immediately, swallow the loss as a lesson learned, and if you want an income producing property find a better investment for your capital. Good luck!


  • Bristles
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Re: Sell or Payoff HELOC?
« Reply #2 on: July 14, 2014, 02:22:54 PM »
You sound like you don't want to 'lose' the $8k-$12k on selling the property and eating the selling costs.  Let's look at things a little bit differently: since you are losing $438 each and every month your condo is fully occupied with an on-time paying tenant with repairs and expenses going exactly to plan, you will lose about $8k in 18 months.  You will lose about $12k in 27 months.  Those are the best case scenarios of holding onto the property!  What if you have a vacancy?  Large expense? You're going to lose money even quicker in those situations.  Will appreciation go up faster than your guaranteed losses?  What if the market turns down again? 

If you can afford to take the hit and cover the selling costs, I say cut and run ASAP.  If you want an income property, buy a property on the basis of creating income.  Most properties purchased to live in don't make very good income properties.