Rental Underwater

Real Estate Broker · Brandon, FL · Member since 2008 · 283 posts · 64 votes

When my wife and I bought a new house, we turned her house into a rental. I negative cash flow about $150/month because the house is underwater by about $80k (value $100k, owe $180k). She took out a first mortgage and a HELOC for the 20% down in 2006.

I have another rental that has a positive cash flow and between the two, I still maintain a positive cash flow every month.

I wanted to get some advice from the seasoned pros as to what their advice would be on the underwater property. Should I try to get rid of it and focus on acquiring a property that has a positive cash flow?

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Jay C.

Seattle, WA · Member since 2014 · 307 posts · 170 votes

12y

Wes,

Some really good repliers here. Like one pointed out the end price only matters when you sell it. Like ij the stock market you have a paper loss since you have not sold and if the market comes back you can recoup it. You said you were $150 off each month.....thats not much. Raise the rent over time and you will be glad you kept it.

One other piece of advice. One poster mentioned he cursed the gov/banks for this. Well let me say it was also the fools who took out these loans and wanted more more more. Its all over this forum BP more more more and no doubt many of these cats are going to have the same demise as many in the downturn. The "I want more" mentality and too much leverage sunk many in the downturn. The banks just enabled those idiots. I on the other hand watched those fools implode and picked up properties for pennies. Back to you....be patient. Time is on your side from your information.

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Scott W.
Real Estate Investor · chicago, IL · Member since 2012 · 1k+ posts · 231 votes
13y
sounds exactly like my situation. just ride it out...concentrate on trying to raise the rent each year, or upon each turnover. if you want to sell the property, you'll have to come to the table for maybe $100k when you considering the selling/closing/holding costs.

you could try to do a short sale, however, sounds like an investment property and they will come after you for the difference unless they agree to cancel the debt, in which case, they will 1099C and you will owe the IRA the phantom tax of the loss.

It really sucks being in this situation...I was literally thrown into this mess over night about 4 years ago and I curse out the idiot govt/bankers who caused this daily!
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
Well eventually the market will come back to a break even point in most markets.

So if rents increased each year and you paid down what is owed eventually you might be able to get out of it breaking even without hurting your credit.

Who is on the loan where you are upside down?? Is it you or her or both??
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Wes Eaves
OP
Real Estate Broker · Brandon, FL · Member since 2008 · 283 posts · 64 votes
13y
@Scott W. That is what I'm trying to do...ride it out...especially if there are no better strategies.

@Joel Owens The first is with Chase and the HELOC is BoA. We refinanced before we moved so we are now both on the Chase mortgage.
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Alan Mackenthun
Rental Property Investor · Englewood FL & Prior Lake, MN · Member since 2012 · 107 posts · 33 votes
13y
It's worth checking with a local RE attorney. You may actually be able to do a short sale. I'd recommend riding it out as most here advocate, but it's good to know your options and the options do vary state to state and lender to lender.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y
If you do not want to affect credit and both are on the loan you need to ride It out.

Have you recently looked at comps to see by what percentage prices are rising every month or few months?? From there you can project out and at least get a ballpark number of years you are looking at.

We call it portfolio averaging where your new properties purchased as a whole if you buy right will help your overall total return be positive.
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Wes Eaves
OP
Real Estate Broker · Brandon, FL · Member since 2008 · 283 posts · 64 votes
13y
@Alan Mackenthun I think, like you and others have said, riding it out is the best option for us.

@Joel Owens good idea about checking the comps to gain a perspective and try to see the light at the end of the tunnel.

Thanks to everyone for the advice! Happy Friday!
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Brian Fouts
Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes
13y
Since you're idle on the property (not being forced into action), you could look into Owner Financing the property to a non-qualified buyer. This could get you out from underneath the payment and you would save on the current loss you are taking, but would also give up any future market recovery. Worth $100k, owe $180k is a large margin to recover via the market I would think... also hard to Owner Finance (sell) for $180k when worth $100k. Tough spot.
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Lizzy Brennan
Fresno, CA · Member since 2014 · 1 post · 0 votes
12y
Would donating be a possibility? My mom just recently donated her rental property because it wasn't balancing. Does anyone have any experience with this?
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Forrest B.
Professional · Tampa, FL · Member since 2008 · 26 posts · 6 votes
12y
Wes,

Not sure where this property is, but having just bought a house in Tampa, and noticing when you posted this, it might be worth reevaluating. Will PM to discuss in more depth.

Forrest
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George P.
Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
12y
Originally posted by @Scott W.:
sounds exactly like my situation. just ride it out...concentrate on trying to raise the rent each year, or upon each turnover. if you want to sell the property, you'll have to come to the table for maybe $100k when you considering the selling/closing/holding costs.

you could try to do a short sale, however, sounds like an investment property and they will come after you for the difference unless they agree to cancel the debt, in which case, they will 1099C and you will owe the IRA the phantom tax of the loss.

It really sucks being in this situation...I was literally thrown into this mess over night about 4 years ago and I curse out the idiot govt/bankers who caused this daily!

i thank those people daily since they allowed me to get 12 homes because of this mess.
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David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
12y
@Wes Eaves

& @Scott W.

I just posted today on another thread here that not all properties make good rentals. The other OP had the same situation, bought houses as an owner occupant, bought a bigger, nicer, better home and kept the first as a rental. Maybe the first home was kept as a rental because it could not be sold. But I know that's a hard situation, but not being able to sell a house is not a real good reason to keep it as a rental with negative cashflow and negative equity.

Short sale is something to consider. From what I've seen some of the big 5 banks have been open to short sales, loan modifications and other help for the borrower. Some banks have reduced the interest rate, reduced the payment amount, and even reduced the principle amount in order to keep the house from becoming a foreclosure and a liability on the bank's balance sheet.

I'd say approach the bank, tell them the situation and that you can't keep feeding the alligator that the house has become. stress that you are willing to work with them if they will work with you to resolve the negative cashflow and equity that this house has become. Its worth a shot.
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Kevin Cook
Lender · Tampa, FL · Member since 2014 · 97 posts · 56 votes
12y
@Wes Eaves I'm new, so please forgive my ignorance if this has been asked (or should have never been asked). Is it possible to either a) improve the property in excess of the amount owed or perhaps b) have someone negotiate to buy the note from the bank and restructure the debt (a private short sale)?
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Dawn AnastasiPro Member
Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
12y
Originally posted by @Wes Eaves:
When my wife and I bought a new house, we turned her house into a rental. I negative cash flow about $150/month because the house is underwater by about $80k (value $100k, owe $180k). She took out a first mortgage and a HELOC for the 20% down in 2006.

If the house was worth $180k, wouldn't you still be negative cash flowing on it about $150/month?
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Ray Blair
Saint Peters, MO · Member since 2012 · 2 posts · 0 votes
12y
Wes, I don't claim to be a pro, but thought I'd share my thoughts since I have a similar issue with one property. In my case, I'm about $20K upside down and about $100 monthly negative cash flow. However, each month approx. $320 is paid down on the principal so I look at it as I'm trading $100 for $320... that makes the pain a little better! ;-) Further, I realize the tax benefits of the rental property (depreciation, etc) which are important to me. Thus, although it's not ideal, riding this out and looking at it from a longer term perspective makes it palatable (at least for me). IMHO, If the $150 negative isn't killing you, enjoy the tax deduction and ride it until a better day prevails.
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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Originally posted by @Joel Owens:
Well eventually the market will come back to a break even point in most markets.

What's break even? I believe that some markets won't recover to the over inflated prices of the Bubble. Everyday I look at $300-350K loans on $120-175K houses. The lending environment created that Bubble. Buyers who can't qualify for anything today could borrow $300K with no down and stated income in 2007. In most of my farms there's simply not enough income and no longer any easy lender funds to make the prices go back up.
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Account Closed
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Originally posted by @Dawn Anastasi:

Originally posted by @Wes Eaves:
When my wife and I bought a new house, we turned her house into a rental. I negative cash flow about $150/month because the house is underwater by about $80k (value $100k, owe $180k). She took out a first mortgage and a HELOC for the 20% down in 2006.

If the house was worth $180k, wouldn't you still be negative cash flowing on it about $150/month?

Bingo. Being upside down doesn't cause negative cash flow. The debt service to rent ratio is way off, and the decision to rent such a property creates negative cash flow.
1 Reply
Justin Donohue
Middle River, MD · Member since 2013 · 23 posts · 2 votes
12y
Originally posted by @Account Closed:

Originally posted by @Dawn Anastasi:

Originally posted by @Wes Eaves:
When my wife and I bought a new house, we turned her house into a rental. I negative cash flow about $150/month because the house is underwater by about $80k (value $100k, owe $180k). She took out a first mortgage and a HELOC for the 20% down in 2006.

If the house was worth $180k, wouldn't you still be negative cash flowing on it about $150/month?

Bingo. Being upside down doesn't cause negative cash flow. The debt service to rent ratio is way off, and the decision to rent such a property creates negative cash flow.

Yes and yes! I currently have a rental that is upside down (albeit not as much as the OP), but still cash flows about $300 per month. I was a able to refi through the HARP program last year and it bumped my cash flow up.
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
12y
@Kevin Cook

a) it costs money to improve a property. You'd be lucky to get $80k in improved value by spending 80k on a house in decent shape, plus it's still in a 100k neighborhood

b)buying a single particular note is difficult, plus it's still a performing note, so getting it for the typical 60% of BPO won't happen.
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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y
Originally posted by @Joel Owens:
...
We call it portfolio averaging where your new properties purchased as a whole if you buy right will help your overall total return be positive.

The stock and mutual fund markets have the notion of "dollar cost averaging"; basically, you invest the same dollar amount repeatedly on some exact dates, the idea being some days you will be buying high and some days you will buy low, but on average somewhere in between.

With real estate, this is not always feasible due to the high buy in costs, because under "dollar cost averaging" you aren't selling to buy the next.

But you can certainly buy new properties with higher cash flow to offset the ones with negative cash flow if you so choose. Whether that is a good or bad thing to do depends on individual circumstances and goals.
0 Reply
Ali Boone
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
The value of a property only matters if you are buying or selling it. That property being underwater won't affect anything unless you try to sell it. So if you sell it you will take a nasty loss, but if you hang onto it nothing will be affected and you will still keep you positive cash flow.

Remember- the value of a property absolutely does not matter unless you are trying to sell it. Or trying for a refi or something like that but those aren't necessary.
1 Reply
Kevin Cook
Lender · Tampa, FL · Member since 2014 · 97 posts · 56 votes
12y
@Wayne Brooks Since I had no reference for the area, I couldn't ascertain its value in relation to its potential value. I certainly agree with you if no additional value can be sought from the property. As for the note purchase, I totally agree. If I were @Wes Eaves I would wholesale my tail off until I could clear that HELOC or refi that unit. Debt stinks.
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Wes Eaves
OP
Real Estate Broker · Brandon, FL · Member since 2008 · 283 posts · 64 votes
12y
@Kevin Cook Thanks for the advice as well as everyone else's input.
1 Reply
Jay C.
Seattle, WA · Member since 2014 · 307 posts · 170 votes
12y
Wes,

Some really good repliers here. Like one pointed out the end price only matters when you sell it. Like ij the stock market you have a paper loss since you have not sold and if the market comes back you can recoup it. You said you were $150 off each month.....thats not much. Raise the rent over time and you will be glad you kept it.

One other piece of advice. One poster mentioned he cursed the gov/banks for this. Well let me say it was also the fools who took out these loans and wanted more more more. Its all over this forum BP more more more and no doubt many of these cats are going to have the same demise as many in the downturn. The "I want more" mentality and too much leverage sunk many in the downturn. The banks just enabled those idiots. I on the other hand watched those fools implode and picked up properties for pennies. Back to you....be patient. Time is on your side from your information.
2 Reply
Henry M.
Specialist · San Antonio, TX · Member since 2012 · 462 posts · 294 votes
12y
I have no CPA experience, but could you not claim the loss on your tax return?
0 Reply
Wes Eaves
OP
Real Estate Broker · Brandon, FL · Member since 2008 · 283 posts · 64 votes
12y
@Jay C. I'm fortunate that it is not a large loss each month, so I'm planning on holding it until it is paid off. Thanks for the advice.

@Henry M. I'm definitely not a CPA either but from my understanding you can't count your mortgage as an expense, therefore it is not a loss according to the IRS. I claim the total yearly rents as income and then I'm taxed on top of that :) It still beats other forms of investing, IMO, so I'm not too discouraged.

I was just trying to find out if I should be doing something different than what I am, but it seems like I'm on the right track!
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