Author Topic: Should I Let My Rental Go Or Continue Losing Money On It?  (Read 6527 times)

jackiechiles2

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Should I Let My Rental Go Or Continue Losing Money On It?
« on: January 02, 2015, 12:56:22 PM »
My wife and I bought a brand new  townhouse right after we got married in 2007.  Stupidly, we believed the market had stabilized somewhat when we bought the house for $124,458, which was $20k cheaper than it had been listed for.  We put around $15k down on it at the time, which we felt was a pretty good amount. Our interest rate was 6.5% I believe.  Well, 2008 hit, and the property value plummeted.  We ended up having to move in 2009 due to my starting law school in a different city.  Throughout 2008 and 2009, the builder continued to build to fill in the neighborhood, but by the time we were ready to move, the builder was selling brand new townhouses our size for $105k, which was more than we owed on our townhouse.  Our payments were around $800 a month, I believe.  I decided we should just rent the thing out, wait for property values to go up, and then at least recover our down payment. 

We ended up renting the house out for $875 a month.  Since we were moving out of state, we got a local property management company to manage it. They take 10% of the gross income per month.  The HOA for the townhouse is $140 a month, and it includes pest spray, termite inspection, grass cutting, pool, etc.   I knew we'd be losing some money at first, but I wanted someone in the house asap and planned on gradually raising the rent or just selling the house in a year or two. That was 6 years ago.

My state's property taxes are low for primary residences- 4%.  What I didn't realize until it was too late, however, is that second homes are taxed at a 6% rate.  This meant when we received our tax bill for 2009, the taxes went from $559 a year to $1865 a year.  Our mortgage payment went up to $950 a month, so we were losing around $300 a month for 5 1/2 years or so.

After many hours of research, I discovered you can refinance an FHA home that is not being used as a primary residence.  I finally found a broker who also realized this, and in March or April of this year, we refinanced the house to lower the interest rate to 4.7% interest.  Our payment dropped back to $805.


Market Value: $85k
Original Purchase price: $124,458
Original Mortgage Amount: 109,458
Interest Rate: 4.75
Mortgage Term: 30
Term remaining: 55 months
Amount remaining on mortgage: $100,288
Gross Rents: 875
Principal and Interest (the P&I of your PITI - should match with the above info): P: $129.68; I: 527.17
Taxes and Insurance (the T&I of your PITI): 277.86
HOA costs: $140
Deferred maintenance notes: N/a that I'm aware of.  Minor issues.  House is 8 years old, however, and I'm sure the AC unit will need to be replaced in coming years.

So I was happy just losing $165 a month after the refinance.  The builder had been building new units until 2012 and was selling those at $90-95k.  I figured in a few years, I'd catch up to the value and at least be able to sell it for what I owe.  That was until I received the recent county reassessment of $84k.  On the one hand, I'm happy that my taxes, and, therefore, loss, will decline by around $30 a month, give or take, but I feel like I'm continually throwing good money after bad.  One of the townhouses down the street from us sold at $85k, so I believe this to be a fair appraisal of the value of the townhouse.

There are some pros to owning a townhouse that loses money.  The losses can be written off, which reduced my AGI by around $8k last year after we had a couple of months without a renter when ours moved out in October.  So that does have a benefit that means I may be breaking even after all is said and done. 

I have tried to raise the rent before without success.  Last year when we had a tenant move out, I tried to re-list the property for $1k a month and had no interest.  $950 likewise had no interest.  At $875, I had someone apply and take it within a week, so I feel that may be the best I can get.

Should I continue to throw money at this thing and just enjoy the tax benefit or should I just walk away and write it off as a bad business decision?

waltworks

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #1 on: January 02, 2015, 01:16:05 PM »
Losing money to save on taxes very rarely makes sense, and in your situation it definitely doesn't. I'd sell ASAP and let your profit be the learning experience.

-W

Cassie

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #2 on: January 02, 2015, 01:22:43 PM »
If you do a short sale you will now owe taxes on the amount forgiven by the lender.  However, I would still cut your losses.

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #3 on: January 02, 2015, 01:23:59 PM »
Let me propose a scenario to you and ask for your advice:

Let's say I try to sell it, best offer I get is $85k.  There's no way I'm going to sink another $15k into this thing to pay off the difference between the loan and the fair market value.  It is an FHA loan, so I'd have to request a variance to get approved for a short sale since it's been used as a rental for more than 18 months.  Assuming the variance gets denied, should I just let it fall into foreclosure?   

waltworks

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #4 on: January 02, 2015, 01:33:31 PM »
In the long run, you'll sink a lot more than $15k. I'd try for the short sale, and if that doesn't work, bring cash to the table to close.

-W

Let me propose a scenario to you and ask for your advice:

Let's say I try to sell it, best offer I get is $85k.  There's no way I'm going to sink another $15k into this thing to pay off the difference between the loan and the fair market value.  It is an FHA loan, so I'd have to request a variance to get approved for a short sale since it's been used as a rental for more than 18 months.  Assuming the variance gets denied, should I just let it fall into foreclosure?

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #5 on: January 02, 2015, 01:37:25 PM »
If you do a short sale you will now owe taxes on the amount forgiven by the lender.  However, I would still cut your losses.

I believe this is only to the extent that I am not insolvent.

Gone Fishing

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #6 on: January 02, 2015, 01:44:47 PM »
A foreclosure would trash your credit for some time, and depending on what line of work you are in, possibly impair future job opportunites as well.  The FHA may go after a judgement for the deficiency if you let it go, and between the foreclosure fees and their poor marketing you will probably come up a lot more than $15k short. Fact is, you owe the bank the money and you need to pay it.  Not paying it when you have the means is a serious character flaw.  I would sell it, pay the difference and move on. 

ShoulderThingThatGoesUp

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #7 on: January 02, 2015, 01:51:59 PM »
I disagree on the morality of just walking away. It's business, and businesses default on loans when they're not worth paying all the time. It's business to the loan holder and it should be business to you.

That said, it's a serious issue and if they can come after you for the remainder, it's hard to see how sending the jingle mail is a good idea. But I think that depends on your state.

Cassie

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #8 on: January 02, 2015, 01:54:31 PM »
It might be worth it to pay a good attorney a consultation fee to determine what the laws are in your state.

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #9 on: January 02, 2015, 01:57:10 PM »
A foreclosure would trash your credit for some time, and depending on what line of work you are in, possibly impair future job opportunites as well.  The FHA may go after a judgement for the deficiency if you let it go, and between the foreclosure fees and their poor marketing you will probably come up a lot more than $15k short. Fact is, you owe the bank the money and you need to pay it.  Not paying it when you have the means is a serious character flaw.  I would sell it, pay the difference and move on.

A short sale also has a negative impact on your credit.  FHA rarely goes after people for deficiency judgments.  If it did ever decide to institute a deficiency action, I think it's highly likely I'd be able to negotiate the amount down to under $15k.     I'm also not sure that pulling the plug on a  bad business decision has a moral component.  I don't think someone is "bad" because they breached a contract for cable, so why does breaching a contract to buy a house make someone a bad person?

waltworks

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #10 on: January 02, 2015, 02:12:53 PM »
Morality aside, I think all of your options will end up costing more (at least if time/hassle is included) than $15k.

Sunk costs fallacy, anyone?

-W

Gone Fishing

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LadyStache

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #12 on: January 02, 2015, 02:46:47 PM »
The amount you're charging in rent seems pretty low, especially since it includes access to the pool and possibly other amenities. Maybe the reason you weren't able to get a tenant at the higher price was due to marketing or time of year?

Also, the 10% property management fee seems pretty high considering it's a townhouse and the HOA should be doing much of the maintenance. You should definitely try to negotiate this down.

Guizmo

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #13 on: January 02, 2015, 06:58:25 PM »
The county assessment is not the market value of your house. Have a realtor take a look at the property and you may be surprised.

tweezers

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #14 on: January 07, 2015, 03:56:52 PM »
The county assessment is not the market value of your house. Have a realtor take a look at the property and you may be surprised.
+1

Our rental property is assessed at $133K, but it was recently appraised for $215K.  An even bigger difference in tax assessed and appraised value exists for our primary residence.

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #15 on: January 08, 2015, 08:50:11 AM »
The county assessment is not the market value of your house. Have a realtor take a look at the property and you may be surprised.
+1

Our rental property is assessed at $133K, but it was recently appraised for $215K.  An even bigger difference in tax assessed and appraised value exists for our primary residence.

The reason I suspect it's pretty close to accurate is recent sales (October and November 2014) of townhouses identical to my model in the same community were for $85k.  Granted, they could have been short sales or foreclosures.

I am considering terminating the contract with the prop management company, which will save me $87.5 a month off the bat. My taxes will drop around $30 a month due to the reassessment.  Also, townhouses near mine that are 3 br 2.5 bath with a little more sq footage have been rented for $1200 a month, so I suspect I could raise the rent on mine to $950-$1000.  Maybe I just grew too impatient renting it out for $875 before.  Either way, I wouldn't be getting much revenue from the place, but at least I'd stop the bleeding.

mydogismyheart

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #16 on: January 13, 2015, 05:49:04 PM »
I have a similar issue and have been debating foreclosure (I do not have the money to come up with the $70K at closing that I would need).  Right now I have good tenants but I lose about $200/mo on the condo.  I manage it myself and it's been just fine.  My condo is a lot older and I purchased it a a fixer, and a lot has gone wrong since these tenants moved in about 3 years ago.  They don't seem to care much and keep on renting as I fix the necessary items when I can.  But I know if these guys move out it will cost me an arm and a leg to get it where it needs to be.  Trying to pay the difference to a bank is out.  It's not FHA, it's conventional.  So I think all the time about what I would do if these guys moved out.  I think it would go to foreclosure, but it's going to depend on how much money I can put into it when the time comes and how much I can increase the rent.

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #17 on: January 14, 2015, 08:38:17 AM »
I have a similar issue and have been debating foreclosure (I do not have the money to come up with the $70K at closing that I would need).  Right now I have good tenants but I lose about $200/mo on the condo.  I manage it myself and it's been just fine.  My condo is a lot older and I purchased it a a fixer, and a lot has gone wrong since these tenants moved in about 3 years ago.  They don't seem to care much and keep on renting as I fix the necessary items when I can.  But I know if these guys move out it will cost me an arm and a leg to get it where it needs to be.  Trying to pay the difference to a bank is out.  It's not FHA, it's conventional.  So I think all the time about what I would do if these guys moved out.  I think it would go to foreclosure, but it's going to depend on how much money I can put into it when the time comes and how much I can increase the rent.

If it's not FHA, you could possibly refinance it on HARP, if it's owned by Fannie or Freddie.  What did you buy it for, what's it worth now, and what are you renting it for?   What's the insurance costs annually? 

babysteps

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #18 on: January 14, 2015, 11:14:40 AM »
based on your headline, my knee-jerk reaction is "no".  But am also wondering about your math.

Looks like $130/mo is going to "equity" (that is, reducing the equity deficit) and $945/mo to current expense (interest, taxes, insurance, HOA).

At that rate, your "break even" for $15k (loss) now or $15k (expense) later is only 16 months!  (looks like the PITI is from pre-refi?  Or do you not escrow for insurance?). 

And you might not have to come up with the $15k at closing (no way to tell until you wind through the  system at FHA).  I have no idea how FHA does things, but some lenders are (were?  have seen this the one time it was germaine) willing to take a personal note for the deficiency if the short seller is solvent. Every lender is different, some require you to miss payments before they consider a short sale, others are more rational.  If you are insolvent you may get out of both the deficiency & paying tax on it, but that's another story.

"break even" to not being under water at your current rate of principal payments ($130/mo now, rises some each month) would be something like 5-6 years.  But in the meantime, at $165/mo loss, you'd be out $9,900 over the first 5 years so that's not really break even in a global sense...

So not an easy answer, but math seems to suggest ripping the bandaid off sooner than later is best.  Given the situation, there's no way to completely avoid a bit of pain.  Good luck with gathering info and making a decision you are happy with.

Poorman

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #19 on: January 14, 2015, 01:08:59 PM »
Interest rates have dropped by 1% since you refinanced, so if you refinanced again it would save you another $80 per month.  Then your negative cash flow would be around $85 per month or just over $1,000 per year.  Personally, if I had to choose between losing $15,000 right now (to sell) or $1,000 per year for the next 15 years (to hold), I would continue to hold on.

One potential escape route is due to the fact that your loan is FHA, which means it's assumable.  Loan assumptions require the new borrower to get a credit check but an appraisal is not required.  Therefore, if you can convince somebody to buy the property based on the low interest rate (assuming you refinance again) they might not care that the property is still underwater.  You would be selling them on the favorable loan terms and affordable payment.  This plan won't work until interest rates rise sufficiently to make  buyers interested in this type of deal, but it could help you get out in a few years if rates rise to 5-6%, even if appreciation doesn't bail you out.  Something to think about.

jackiechiles2

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #20 on: January 14, 2015, 01:21:53 PM »
Interest rates have dropped by 1% since you refinanced, so if you refinanced again it would save you another $80 per month.  Then your negative cash flow would be around $85 per month or just over $1,000 per year.  Personally, if I had to choose between losing $15,000 right now (to sell) or $1,000 per year for the next 15 years (to hold), I would continue to hold on.

One potential escape route is due to the fact that your loan is FHA, which means it's assumable.  Loan assumptions require the new borrower to get a credit check but an appraisal is not required.  Therefore, if you can convince somebody to buy the property based on the low interest rate (assuming you refinance again) they might not care that the property is still underwater.  You would be selling them on the favorable loan terms and affordable payment.  This plan won't work until interest rates rise sufficiently to make  buyers interested in this type of deal, but it could help you get out in a few years if rates rise to 5-6%, even if appreciation doesn't bail you out.  Something to think about.

I actually just learned that it was assumable today, so that's definitely something I'll keep in my back pocket as a potential out.  I'm going to end the property management expense and just manage it myself, so that'll reduce my losses another $87.50 a month.  The recent re-assessment reduced my taxes by $35 a month, so I'll be down to $40 a month in losses.

The only potential drawback with the FHA refi is when I first bought the house, the PMI rates were .55.  When I refinanced, I kept the .55 PMI rate, but lost the ability to kick it off at 78% equity from original purchase price.  I looked into refinancing again, but apparently I'd be subject to the 1.35 PMI rates now, which would increase the payment by like $100 or so.  Once the new PMI rate of .8 goes into effect at the end of January, the PMI increase will be $20 a month, give or take, so it could still make sense to refinance if the rates are significantly lower than the 4.7 I currently have.

Poorman

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #21 on: January 14, 2015, 03:10:21 PM »
If you do a FHA Streamline refinance it should allow you to keep the old PMI rate of .55%.  It gets kind of complicated depending on when the original loan with FHA was financed, but it seems like yours was in 2007 so it should be grandfathered in.  Talk to your mortgage guy about it.

jaydigital

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #22 on: January 15, 2015, 09:30:05 PM »
For more solid advise, please read my post. I am truly appreciative of this community.
http://forum.mrmoneymustache.com/ask-a-mustachian/need-extreme-help-before-i-make-a-very-costly-decision/

jodelino

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Re: Should I Let My Rental Go Or Continue Losing Money On It?
« Reply #23 on: January 15, 2015, 09:49:54 PM »
I believe that if you were to sell it for $85K, given your purchase price of $124K, you'd walk away with a capital loss of about $40K which you could apply bit by bit (I think $3k per year) to many future years of taxes until you'd used it all up, or could use all at once if you had a big gain somewhere else. I'm not sure about this, but I think I've got that right. Check with an accountant.