First, sorry for the long post.
Before I found BP I started investing in SFR's in Phoenix metro area. I bought on the basis of rent covering PITI and thinking I was good. Surprise, surprise, I was not. It has yielded -$200/month over the past 6 years...yikes.
So, this is the last property I have from that era and now have the opportunity to sell (been waiting on tenant to move out as they have been there for 4 years) but due to what I owe, this is painful.
Here is my scenario and options as I see them. Thoughts?
First, the basics details:
- - Amount owed on loan: $139k
- - Asking price: $129k as-is, $134k with $2k work put in
The property has rented well (low vacancy, good tenants) BUT looking over the past 6 years I have a NEGATIVE cashflow of $200/month (if only BP was here in 2002 :) so I am looking to dump the property in order to get this off of my balance sheet.
- - Passive losses of about $30k tied to property
- - Purchased for $153k initially and depreciated to a cost basis of about $108k today
- - last tenant has been there for over 4 years at $950/month
I see 3 options.
1. My thought was to sell the property for a loss, pay the bank the difference (Short sale is not an option for me today) writeoff the loss and get the passive losses applied to income this year. This would be a big loss up front (~$18k) and the taxes will not zero it out on next years return as far as I know.
2. Lease Option the property with a 2 year lease. This will secure rent (barring tenant issues) the next few years and hopefully will give the tenant/buyer a way to buy at an agreed price that is close to what I will owe at end of 2 years, will save me RE commission and get me much closer to that net ZERO.
I really don't know how to market or find lease option prop managers/agents but will go that route if folks think that makes sense.
3. Keep the property and rent it back out, eat the $200/month, hope for better market and sell in a few years. At least I would not eat the $18k this fiscal year.
Any other thoughts? Am I missing anything? Part of me wants to purge the younger/dumber me but at the same time I do not want to lose that $18k as I have some interesting RE purchases on the horizon and have 2 flips under contract that I could surely use the $$.
Thank you for reading this long post, I appreciate it.
@Brian Larson Here are a few thoughts:
Put the 18k down on the property and recast your loan payment to recalculate the monthly payment. That should get you closer to break-even and only cost a few hundred dollars to do the recast. If the 18k is sunk money on a sale but gets you to break even and allows you to pay down the principle then over time you will gain ground.
If you have an older loan with a higher interest rate you could try for a 30 year refi using he 18k to bring the balance down, but your equity build will be very small at the front end.
Sell to an investor with subject to / wrap financing. Get a down payment from them and use it to recast the loan, lowering your payment, and see if you can come out even. This would save on realtor fees. You could join AZREIA and post and add there.
Increase the rent, $950 sounds low for rent, I live and invest in the Phoenix area, feel free to send me a PM with the address and I will be happy to pull rent comps and see if there is any upside for you. I can also pull sales history for your area if you would like.
Thank you Bob. Great insight on recast. I am not sure if that will make it work but will investigate.
I will reach out via PM now. Thank you!
Hi Brian, I'm in the process of cutting loose a negative cash flow looser rental in ABQ NM from when I was a lot dumber 10 years ago. I will have to write a big check to escrow to close the sale. I'm amazed and delighted I even found a FHA buyer at a decent price.
I couldn't do a short sale as I didn't want to wreck my credit and go though all of that (and I have no hardship and cash in the bank). I looked at the lease option angle. It might have worked OK, I don't think it's a bad way to go. I just decided to unload it and take a big loss and write it off. One of the things I looked at was there were a lot of big ticket items that I was on the verge of needing to replace (roof, furnace, etc...). And I just wanted to unload it before these came up and I had to sink more money into it. I just didn't want to spend a lot of time and effort anymore on a property that was just a loser for me and far away and out of my control. And I had no idea where prices would go in the future in ABQ which has a bad economy. But saying all that, a lease option might have worked OK and saved me a lot of money had I had the patience and time to put into it.
As a side note, I always say now that newbie investors can be "weapons of financial destruction" when they take action before they know what they are doing. It takes a lot less then people think to lose a ton of money on a negative cash flow rental that you bought wrong, especially if it is far away and out of your control. The price doesn't have to fall much and you will lose a ton unloading it with all the transaction costs involved in selling real estate (Realtor commission, closing costs, vacancy period while listing to sell, fix costs). If the price falls 10%, you lose a lot more then 10%. Plus the total of all the negative cash flow the years you held it. It is a very expensive seminar!
Hi @Brian Larson you are probably eligible for a HARP loan which by re-financing may get you into a better position; additionally by raising the rents you maybe able to get to a positive cash flow on the property. Not sure what is entailed with the HARP loans, but heard they are favorable.
Since the current tenants have been there for 4 years, it is time to look at the overall profitability of the property in detail prior to dumping it. Prices in the Phoenix area are on the rise and maybe it will take a longer period of time to recoup your money, but would look into doing a HARP - your lender can do this, but so can most lenders - time to shop around!
Option #2 is a good alternative, but you really need to get into a better position overall on the property no matter what path you take.
@David P. I thought one of the qualifications of HARP is that the home must be owner occupied. Investment/rental properties don't qualify. Correct me if I'm wrong.
Hi @Thai Foo I am not in the loan business, but I think that was under the original program. But I think I remember reading that it changed with the revised HARP (V2) - either way worth checking into for sure!
Maybe one of the loan gurus can help define the terms for us.
Investment properties do qualify under Harp2. If your servicer/Lender is one of the big bangs and its a Fannie/Freddie loan your best best to check with them first, and then check with other brokers. Sometimes the lender who holds the debt has guidelines that other brokers do no have. I know this is the case with BofA
Q quick check shows if you put down another 18k and refinanced at 4.5% for 30 years your payment would be $613.09. Not sure if that helps or not.
I don't recall if you were paying PM fees or not but we have friends that have moved out of state and are managing their old house as a rental property. They hired my wife to put the house on MLS and list it, so it had a lockbox and and agent was with anyone looking at the property and they arrange for any repairs.
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