Should I Pay Anything Towards Monthly Rent of my Property?

34 Replies

So here is the situation everyone...

My wife and I bought a condo back when the market was sky high at 439,000. It went as low as 300,000. It's now around 410,000 and we owe 415,000. Our monthly mortgage is about 1900, property tax around 350 and HOA dues are 446. Let's call it an even 2700 a month.

The going rate to rent this property in my condo complex is about 2,000-2250.  Let's say I can get the top amount (not sure if I can), and I got with a property management company, I end up getting about 2,025 a month.  I still owe around 700 a month.

IF I can afford to pay that 700, does this make sense?  Part of me feels the property SHOULD be giving me cashflow or at least breaking even.  The other part of me is like, "Well, if someone is paying the majority of my mortgage and I can wait out the prices to climb more, etc, this might be worth it."

Is there a firm formula or rule of thumb for people on how much to put back into a rental on a monthly basis?  Any help would be appreciated.

There's no formula because as investment it's a terrible idea and nobody would buy it as rental.  Your situation is different because you're stuck with it and not buying it for investment purposes.  If you listed it right now you'd probably end up with about $375k after commissions and closing costs so you'd have to bring $40,000 to closing to be rid of it.   Forget the part of you that thinks it should cash flow, a $400k condo is going to make a terrible rental property and will almost never cash flow. 

You really have 3 major options unless you want to get into something risky like selling sub2.  

1. You rent it out and eat the $700+ a month in losses.  Keep in mind that this amount doesn't include any repairs, vacancy, evictions, capital improvements, etc.  You will likely lose far more than the $700/month.  

2. Bring $40k to closing and be rid of a bad investment.

3. Don't pay anything and have it foreclosed on or work out a short sale with the lender.  You will have a foreclosure on your credit and a judgement against you.  On a short sale you'll have a credit hit and will get a 1099 for any forgiven debt, but if you have the ability to pay the bank may not approve a short sale. Since you said you have the ability to pay so a judgement against you and a big hit to your credit is probably something you'd rather avoid.

I had a similar situation with my former primary residence that I purchased in 2004 before the peak of the market here.  I moved in 2010 at the absolute bottom of the market and bought a bigger nicer home but I was unable to sell my old house for what I owed on it and I chose to eat a $600/month loss and rented it out for 4 years.  During those 4 years the market value of the house improved by $100k which more than offset the loss during that time and I sold it last month and got big check rather than writing a big check (I still lost money on the deal).   I hated having something that was losing me money every month and it was a big load off to sell it.  

@Jason Panick  

You are in CA and real estate price volatility is unlike very many other places, but there's absolutely no way that I would put 8400/year of negative cashflow into a property.  You are only 5k away from a break even number on selling, but that's only if you sell it yourself and make no concessions.  I have no idea if that's doable/advisable in your market?  If prices are moving upward, I would put such a property on the market ASAP.  You are "bleeding" bad, real bad.

depends on your long term goals. Most of the time I am a huge proponent of holding property. My entire website and business model is based on that. After 7.15 months you have broke even ok your loss. While that is not counting closing costs or principle payments. Unless you predict it to go back up quickly . I would sell at a tiny loss to prevent the generate of $700 a month.

Yeah, thanks guys.  I've contemplated short selling MANY times (we just got preg which could be the excuse we need) but have been real nervous about the credit hit as far as being able to rent a property myself or buy in the near future without getting screwed on rates, etc.

Yes, the market is so volatile that it could EASILY (and I say this because similar properties have done it) jump to 430 or 440 and I could get out breaking even on the sale or whatever...BUT, I have to sit around waiting for that. :/

@Jason Panick  

One other option to add to the list of @Patrick L.  : Rent-to-own.   It may or may not make sense for this property and with the added overhead of new regulations in the U.S.A., may not make sense for you.

However, if you can find an tenant / buyer interested willing to purchase the condo a little below market $375K; sell them the option to purchase and then (separately) rent it to them until they exercise the option, you might be able to mitigate your loses a little better than a strait sale and bringing 40K to the table. 

Elizabeth, would you recommend a short sale or trying to bring money to the table?  After a long set of fertility treatment bills, we're finally preg (yay) but cash poor.  I'm trying to focus on saving some down payment money to get a better property down the road but would like to get this property off my back.

THAT BEING SAID, you have to live somewhere right?  And while 2700 would rent my family a bigger place here, it would still be 2700 out of pocket every month (rent is expensive here, I'm in Santa Cruz County).

PS, what's really killing me on this property is the HOA dues. Which basically pays for maintenance of exterior of property, landscaping and a pool (this is a 70 unit condo complex). When we moved in, it was 275 a month, now it's 446. That takes a big bite out of the rental potential and out of the property value because you don't get much for that high price.

Have you considered just staying at the condo for now and waiting to purchase or rent a new property?  I know it may not be ideal with the growth of your family but you may be able to by time before making a rushed decision that will cost you a lot of money.  

Good point Patrick.  We've considered staying there another year or year and a half, but are not sure that paying 2700 a month on a dead weight property is prudent.  Not sure if taking the short sale hit but possibly renting something cheaper is's a problem with a lot of variables.  Which is why I appreciate everyone's help!  Thanks!

I would definitely cut my losses and take the 5k loss.  

Well, as many have said, to get out of the property is going to take a sale of about 440,000.

short sale will affect your credit "and" you have to be approved. The thing with short sale is you have to show need, not just underwater. The other issue is you will have a tax penalty. The it's considers the "forgiveness" to be a gain in income. So depending on your tax bracket you could owe 15-35% on any gain.

Originally posted by @Jason Panick:

Well, as many have said, to get out of the property is going to take a sale of about 440,000.


First congratulations - your world is about to change ;-)

If you stay put for another year or two (newborns really do not need their own room - ours stayed with us for much of the first year), your remaining debt at that time will be lower and you will might well stand a better chance of coming out of a sale with fewer scares.

Great ideas - two more thoughts.

1.  Change the model. Use the tourist pull of Aptos and research turning it into a vacation/short term rental. Did that in Fort Myers and went from 24K/annual rent to 68K.  Of course there were a lot more expenses but the net was still substantially higher.

2. While it always sucks having to dip into your own pocket don't forget that the rent you are receiving includes probably around 600 - 700 of principle return.  So at the end if you stay the course your true out of pocket will be closer to 100/mo right now and that's only getting bigger the longer you hold it.  There's no such thing as a cheap way to cut your losses.  the sale will cost more than you think and if you walk away the ramifications to your business model will be horrific.

Patrick's point about waiting and patience is well said.  Remember #2 above.  Your not spending 2700/mo your actually spending around 2000 and banking around 700.  So what can you rent in Aptos for 2000/mo?  You may find there's no place like home.

By the way here's another really scary thought - Run for the board and vote the dues down!!


The short sale is probably your best option. 

Another alternative idea is to turn your condo into a home business for a couple of years and run a day care center out of it. The cost of child care is so expensive, there might be other families in your area that want a close by day care. Just trying to get creative....

Thanks Roy!

Dave, I'm about at the end of my rope with the HOA. Dave, are you saying there is a way to generate more income doing short bursts of vacation rental? Wouldn't that primarily only work during summer months? Also, what would the added expenses be? You mean constant advertising etc?

Originally posted by @Jason Panick:

Good point Patrick.  We've considered staying there another year or year and a half, but are not sure that paying 2700 a month on a dead weight property is prudent.  Not sure if taking the short sale hit but possibly renting something cheaper is's a problem with a lot of variables.  Which is why I appreciate everyone's help!  Thanks!

 Well you have to live somewhere and if market rent for your current place is $2,000-$2,200 and you consider it to not be enough to meet your needs then unless you move to a less expensive area you are going to going to pay more or have a lower quality/sized place to live.  How much would you really save, especially considering you'd have to budget for repairs and vacancy at your rental property in addition to your expected losses.  I wouldn't consider paying $2,700/month as "dead weight" unless you absolutely think you're going to do a short sale down the road.  Otherwise you're preserving your credit and paying down some principal at the same time.  

 Like I said before, I was in a similar situation and the reason I chose to take the financial hit was because I purchased my dream property at a nice discount.  I wouldn't have done it otherwise.  A short sale wasn't an option for me because there's no way I'd qualify under any hardship criteria and as a self employed person I absolutely cannot afford to take that type of credit hit. 

Babies don't take much room, especially for the first year. Unless you're worried about the market taking a down turn turn I'd stay put. You could consider listing it FSBO to save commissions but you'd get a minimal amount of exposure compared to listing it with an agent. If you're living at the property it's not a big deal, if you happen to find a buyer then that's great and if not just keep living there.

I saw the vacation rental suggestion and I'd lump that in the category of risky options (along with sub2 and rent to own).  You'd have to be prepared for huge seasonal swings in income as well as much more damage and wear and tear to the property.  This type of risk may be acceptable for some and a huge source of stress for others, it would depend on your level of risk tolerance. The first issue to consider would be if the COA even allows it as most have rental restrictions and do not allow short term rentals.  

There are a couple of questions that I like to ask when this scenario is presented.

1) If you had to pay the 40k to get rid of this property, would you be able to?
Sometimes, this is a no anyway so selling isn't really an option after all.

2) Do you think the price of the home will go up enough to cover the 8k a year,
you are currently losing? And more with vacancy and repairs?

If you think there's a possibility that it might jump up 30k or 40k in one shot,
then it might make sense to ride it out a bit.

3) How much principal paydown are you getting each month?
Even if the price stays the same, you should be paying down the loan quite a bit
on that size a loan amount. So are you really losing $700 a month.

At some point, the loan paydown and the appreciation will get you out of the hole.
The question that only you can answer is do you think it will be sooner rather than later.
If it takes 2 years, then that means you will have come out ahead by not selling now.
If it takes 4 or 5 years, then you're possibly losing by not selling.

Normally, the question is whether it makes sense to keep a break even property vs taking a loss to get rid of it. The answer I always give to that is a no brainer - hold the property until it goes up. Even at break even, you're making money on principal paydown and the like.

But in this case, you're actually taking sizable losses every month that at some point really will outweigh the amount of money you may have to come out of pocket on a sale today.

That 3 or 4 year mark seems to be the true break even point as to which choice is better.

Here's one other thought though.

What if you take that 40k and use it as a down payment for another investment property that cash flows say, 400 to 500 a month? At some point, there are a few of us that have done just that.  Instead of getting rid of this one that is losing money, go buy 2 or 3 that make enough to cover the payments on this one.

Then you have control of 3 or 4 properties that are making a little bit of money hopefully.

All good advice.  Hmmm...I think I'll stay put and keep my eye glued to the market.  You all helped A TON so thanks so much.  Lots of options but I'm not a savvy landlord or RE investor, so my best bet is probably to preserve my credit, keep saving for a down on another property and cross my fingers that by the time I want to move we've hit just the right kind of market to get out without too many scars. :)

@Jason Panick  you won't qualify for a short sale until you have stopped making payments on the property. Once you do that your credit is going to take a hit and that will cost you in many many ways. Finally there is not guarantee that the bank will even take a short sale even after you stop making payments.

Instead of saving for a downpayment, pay down your existing mortgage. Savings earns about 1% at best. Making extra principal payments reduces your outstanding balance and provides you the rate of return of your loan interest rate (say 4.5%).

Bill the only thing that scares me is the volatility.  I'd hate to pay down the principle and then watch the market tank or a bunch of other owners in my complex short sale/foreclose and I'm stuck with all this money in my mortgage.  I agree with what you're saying but my fear is the liquidity is not great when you are talking about putting money into a property that has already sunk down to nearly 300k once before.  Short answer, I'm terrified of that. haha

Ha Jason, The HOA board suggestion was with a lot of tongue in cheek! I can only imagine your frustration.

RE: vacation rental.  Everything's risky until you study it know it and apply the model to your own situation.  And then everything's still risky- just less risky.   The model may not work for you.  Check out and talk to some owners in your area to get a sense of the possibilities. 

I don't envy you at all, whatever way you go, the best of luck and let us know how it all plays out... Maybe try putting it on the MLS to see if anyone bites at the price you need to break even. You might find someone with not much investing experience who will buy it, and in CA, there are bidding wars, so you never know. Find a realtor on and see if you can just try to sell it for break even...

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